In the past, trusts were drafted with little flexibility and Trust Protectors didn’t exist. However, over the past 50 years, trusts have been drafted with increased flexibility and Trust Protectors are now common. There are even ways under the laws of most states to change “irrevocable” trusts.
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 specified 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 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 the policy in the Trustee’s estate for estate tax purposes, even though the Trustee’s estate isn’t the beneficiary of the policy. On the other hand, if the Trust Protector makes decisions regarding the policy, the policy wouldn’t be included in the Trustee’s taxable estate.
The Trust Protector could also be given the power to act when the Trustee has a conflict of interest. For example, let’s say the Trustee is involved in the family business and has a contract to buy the family business for the value used in the estate tax appraisal. If the Trustee is the one to select the appraisal to use, they could influence a lower appraisal value. While this would benefit the Trustee personally, it could shortchange the other beneficiaries of the trust because there would be less money from the sale of the business.
Sometimes there are disputes between the Trustee and the beneficiaries of the trust. A Trust Protector could be useful in resolving those disputes. By utilizing a Trust Protector, the dispute can be resolved without the cost and delay of litigation.
A Trust Protector is one way of adding significant flexibility to a trust. This increasingly common tool adds flexibility while protecting both the Trustee and the beneficiaries.
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
Steve Hartnett
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