Trust Protectors Add Flexibility

In the past, trusts often were drafted with little flexibility. Now, more and more, trusts tend to be drafted with increased flexibility and there are even ways to change “irrevocable” trusts. This is the second part of a three-part series.

The first part examined ways of building flexibility into a trust. This second part examines using Trust Protectors to add flexibility to a trust. The third part will examine modifying a trust by going to court.

While the Trustee is the person who manages the trust on a day-to-day basis, the Trust Protector is called upon to act only in special circumstances. The Trust Protector typically cannot be the Trustee, a beneficiary, or someone related or subordinate to either of them or the grantor of the trust.

The Trust Protector can be used to save the Trustee from various different problems. The Trust Protector might be called upon to act if the Trustee has a conflict of interest or would have adverse tax consequences from acting. For example, let’s say the trust owns a policy on the life of the Trustee. The trust might include language requiring the Trust Protector to make any decisions regarding that policy.

If the Trustee had the ability to make decisions regarding the policy owned by the trust on the Trustee’s own life, it would cause inclusion of the value of policy in the Trustee’s estate for estate tax purposes, even though the Trustee’s estate isn’t the beneficiary of the policy. If the Trust Protector makes decisions regarding the policy, the policy wouldn’t be included in the Trustee’s taxable estate.

The trust also could give the Trust Protector the power to modify the terms of the trust if there’s a change in the law or beneficiary circumstances warranting such a change. For example, let’s say trust includes such a provision and the trust provides for equal distributions to the three adult children of the grantor. One of the adult children wins the Powerball Jackpot. The other two adult children are elementary school teachers of modest means.

The Trust Protector could amend the trust to split the trust between the other two adult children who did not win the Powerball Jackpot. Using the power to modify the trust based on a change in beneficiary circumstances, the Trust Protector also could change the manner a beneficiary received their trust.

For example, let’s say a beneficiary were to get their share in a typical trust, but the beneficiary developed special needs. The Trust Protector could amend the trust to leave that beneficiary’s share in a Special Needs trust so it would not preclude the beneficiary from receiving Medicaid or other public benefits.

A Trust Protector is one way of adding flexibility to a trust. The next article in the series will examine how the trust may be modified by going to court.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com