Should I Worry About Giving Power to a Trust Protector?
Trust Protectors have become a common feature of many trusts created by up-to-date attorneys—even though clients do sometimes express concern about giving power over a trust to a third party, even a reputable attorney.
Clients ask, “How can I give that kind of leverage to an attorney? What if they decide to do something really crazy?”
Let me assure you that in my 26 years of practicing law, in my affiliations with numerous legal groups, and in my discussions with innumerable estate attorneys, I have never heard of a single case of a Trust Protector “going rogue.” I do know that the risks in not having a Trust Protector are far higher, because as I and my colleagues have seen many times, the chance of something unforeseen occurring after you pass away are serious indeed.
Again: when you pass, your Revocable Living Trust becomes irrevocable. That means no changes, no modifications—without a Trust Protector clause.
Not all California Estate Planning attorneys recommend Trust Protectors, partly because not all lawyers are even familiar with the role and definition of a Trust Protector. Here at CunninghamLegal, however, we generally urge clients to consider adding a Trust Protector clause to any trust, and especially to those designed to last a long time—more on that later.
Trust Protector Definition
Before we go on, let’s back up and clearly define our terms: What is a Trust Protector, exactly?
Officially, a Trust Protector is a disinterested person, almost always an attorney named within the trust, who has power over the terms of a trust but who is not the Trustee.
The Trustees themselves are “fiduciaries,” meaning they have the legal and ethical responsibility to take care of the money and assets of others–in this case, the Beneficiaries of the trust. As fiduciaries, Trustees are strictly bound by the terms of the trust, and have the responsibility to do so—a Trustee must carry out the terms of the trust exactly as written.
The Trust Protector cannot, for example, make a payout from a trust—only the Trustee can do that. But the Trust Protector can modify specific provisions to conform to the “Grantor’s Intent,” or when circumstances change. They can correct errors or omissions in the trust, but they do not replace the Trustee.
Crucially, the Trust Protector can give “new instructions” to the Trustee. This helps ensure that the Trustee is lawfully permitted—or, in other circumstances, required —to “do the right thing.” Indeed, in order to make sure the trust conforms to the Grantor’s Intent, or to ensure the trust remains fair and equitable, the Trust Protector has specific authority to change parts of an irrevocable trust.
Such changes would normally be possible only through the courts. So, in essence, a trust protector is, in part, a substitute for a judge and a court.
How Trust Protectors Came to Have Their Powers
At this point you may well be asking how it became possible for an “irrevocable trust” to include something like a Trust Protector clause at all. After all, when you set up a trust and you name a Trustee, you say, in essence, “the Trustee is going to do these things in this manner, in this order”—so how is it even possible that could be changed by a third party?
To understand current law, it’s worth looking back into history, where the very concept of a trust had its origins in a societal effort to create fairness and to do the right thing.
Trusts originated in the 12th century as a hybrid of English Common Law and the Court of Chancery, and were a direct result of the Crusades. As men would go off to fight in the Crusades, they would leave their property and lands to someone to look after, collect rent, and so forth, in essence, a “Trustee.” Then, after fighting in the Crusades, the men would come back, and guess what … they sometimes found a big problem, because they discovered they’d unintentionally given their property to their trustee.
A serious remedy was needed, as these hapless crusaders were being cheated out of their lands and property by the very people they’d entrusted with everything they owned.
Now, in old England, the Court of Chancery had the jurisdiction to rule on church-related matters, which included guardian estates and even land ownership. The remedy? The Lord Chancellor, through a “Court of Equity,” could decide in favor of the returning crusader based on “fairness” and not the letter of the law. This means they could return the lands and property to the correct owner—despite the title documents and so on saying someone else owned them.
Over many years, history, and distance, a body of law developed in which Trustees hold “legal” title to land and property for the benefit of beneficiaries who have “equitable” title. This crucial split between legal title and equitable title is fairly unique to Anglo-American law, and not found, for example, on the European continent.
Since we don’t have Lord Chancellors doing the work of separating “legal” from “equitable” anymore, you will need to find your own Trust Protector.
Who Can Be Assigned as a Trust Protector?
Although Trust Protector language is included in Revocable Living Trusts in order to provide flexibility, the parameters regarding who can be named as a Trust Protector are actually pretty stringent.
As I mentioned earlier, a Trust Protector is almost always an attorney. In fact, it’s usually the lawyer who drafts the living trust, or a succession of lawyers within the same firm–because part of planning for the future includes planning for the possible demise or retirement of trustees and attorneys alike.
The Trust Protector need not be an attorney, but by law they must be:
- A third party to the Trust (i.e. not the Grantor, or Trustee, nor a Beneficiary)
- A person who is not related to or subordinate to the Grantor.
- Someone who is able to perform the functions of a Trust Protector.
You could name your friend Fred as your Trust Protector, but would Fred a) have the time, b) know what to do, c) be alive and healthy when needed? Would anyone be watching Fred to see that he did the right thing? Along with knowing what to do and having the professional time to do it, a licensed attorney, or actually an attorney appointed by a firm with longevity, will be bound by laws, ethics, and reputation to act as Trust Protector.
No matter how great your friend Fred might be, I’ll take the pro every time.
The Trust Protector Acts in Place of the Grantor
Importantly, the Trust Protector can monitor the activities of the Trustee—and note that the Trust Protector is given powers to accomplish this monitoring. This includes the power to remove and replace an offending Trustee (for example, a Trustee who goes rogue and starts giving money to people not named in the Trust).
That said, although the Trust Protector has the power to monitor the Trustee, they have no duty to do so, and cannot be held liable for failing to perform their monitoring.
Overall, the Trust Protector should accomplish tasks for the Grantor that the Grantor cannot do personally because of tax (more on that later), other legal prohibitions, disability or death. They must ensure the “Grantor’s Intent” for the Trust is carried out because the Trust is irrevocable, as when the Grantor of a Revocable Trust has died.
Those tasks can include many important updates, from correcting typos in the Trust to adding or eliminating a beneficiary like the example of the twin grandchildren above, or changing the “situs” of the Trust as people move to a new state with different laws.
Trust Protectors can limit the power of a Trustee, and support them at the same time, adding to the strength, as well as the flexibility of the trust.
What Triggers the Actions of a Trust Protector?
What may trigger the intervention of a trust protector? If you are the Trustee or a Beneficiary of a Trust, you may well wonder if your Trust Protector will be constantly watching out for your interests, or suddenly stepping in to meddle.
The answer to both questions is probably no.
A Trust Protector is not omniscient, and will almost certainly not be checking in from time to time. For the Trust Protector’s role to be triggered, someone involved must step forward and request that they take action.
Someone, such as a guardian, may for example know that a beneficiary who is disabled or has special needs will be moving to another state with very different laws and public benefits systems. This guardian may ask the Trust Protector to amend the trust to take into account the new system.
In a more common case, a trustee may realize that he or she can no longer serve, and appeal to the Trust Protector to name a new trustee, without going to court. Or the Trustee may see that important trust changes must be made to account for new tax laws.
Trust Protectors for Asset Protection while You Are Alive
A Trust Protector may be crucial not just to modify your trust after you pass away and ensure your wishes are carried out. A Trust Protector may be crucial to certain trusts you use during your own lifetime.
For example, you may create an irrevocable trust to protect certain assets from creditors, from a divorce, or from lawsuits—as we discuss more fully in our article on Asset Protection. But circumstances may well arrive when the Trustee of such a trust needs to be changed, or other terms modified, to prevent the seizure of those assets in a court proceeding.
You need a good, savvy lawyer to construct asset protection trusts with appropriate powers for the Trust Protector.
The Seven Top Reasons to Consider a Trust Protector
Although staying out of probate court is a major benefit of appointing a Trust Protector, it’s certainly not the only one.
Here is a list of my Seven Top Reasons to Consider a Trust Protector:
- Making necessary modifications because of changing laws, family configurations, shifting assets. We already discussed this in the case of the widow, above, but examples abound. Along with families experiencing births, deaths, and divorces, it’s not unusual for inheritance and tax laws to change between the time the Trust is written and the time the Grantor dies. If so, a Trust Protector can change the terms–without going to probate court.
- Long-Term Trusts. Many Living Trusts are designed to provide an immediate payout and then dissolve. But other trusts are designed for the long term: trusts for minors, for people with disabilities and special needs, family trusts to hold important assets across generations. Long-term trusts absolutely demand Trust Protectors, because laws and circumstances are pretty much guaranteed to shift during their effective existence, and catastrophes can result if a trust cannot adapt.
- Protect Inheritances from Creditors. A well-written Trust Protector clause can save beneficiaries from losing their inheritance to bankruptcy, lawsuits, divorce and other catastrophic circumstances—while still giving them access to the funds. Let’s take the example of “Kevin” who is dealing with a devastating lawsuit related to a traffic accident, including a huge judgement which prompted him to declare bankruptcy. Suddenly, Kevin finds himself inheriting a large sum as beneficiary of a Trust from his parents, in which he is named Trustee. Will the bankruptcy process take that inheritance from him as the effective trust holder, too? If the Trust includes a Trust Protector clause, Kevin can pick up the phone and say, “Hey, Ms. Trust Protector, will you please remove me as Trustee and appoint my best friend, Tom, as Trustee? ”The Trust Protector will have the power to make that change. Then Tom can exercise his discretion as the new Trustee and not distribute Kevin any money immediately that could be seized by Kevin’s creditors. Interestingly, even though Tom is now holding on to the inherited funds, Kevin still has the right as an individual to get money from the funds in appropriate, bite-sized chunks. This may seem contradictory, but that’s how the law’s written: Kevin’s inheritance is now protected. Though once Kevin pulls any money out of the trust, that money will no longer be protected—so he should spend it fast. I’ve greatly simplified a complex situation involving a well-constructed “Inheritance Protection Trust,” but it can be an entirely legitimate strategy under the law. Obviously, you need an expert attorney in estate planning to do it right. Make sure to read our full article on Asset Protection, including for your heirs.
- Lower Estate Taxes with Trust Protection – Estate taxes are calculated on the total value of estates, which may or may not include assets held within irrevocable trusts created before the original Grantors passed away. Some powers retained by the Grantor or granted to a Trustee or Beneficiary could unintentionally result in those Trust assets being included in an Estate–with potentially devastating tax consequences. It’s a complex subject, but yes, believe it or not, just the fact that the Grantor or Beneficiaries are granted certain powers, could mean more taxes are incurred when the Grantor dies. A Trust Protector can modify the powers within the otherwise irrevocable trust to prevent such an occurrence, before or after the original Grantor passes.
- Dealing with Special Assets in a Trust – Let’s say a Grantor feels a Trustee does not have sufficient expertise to handle a special asset. A Grantor can appoint a Trust Protector who possesses the special expertise to handle that asset or who can monitor the Trustee’s decisions about that special asset.For example, let’s say a Grantor leaves his nephew his retail motorcycle business, but the nephew knows nothing about motorcycles and even less about running the business. The Grantor can name a Trust Protector who knows a lot about both to step in to make decisions on his behalf, thus protecting both the business and the nephew.
- Privacy – Many of the powers given to a Trust Protector would normally be handled by a probate court. Probate court, as we discuss elsewhere on our site, is a very public process that puts a lot of the Grantor’s personal details on display. A Trust Protector can help avoid probate court and therefore, prevent a lot of confidential information from being revealed in court. This may be especially important in cases where mental disability is involved. Keep in mind that the privacy issues generated by probate court aren’t just about being publicly embarrassed. Once in probate, the names of all estate beneficiaries and all the details of the finances are made public—right down to the date each person inherits and the specific amount of that inheritance. Professional predators gather probate information, and then show up with scams of all kinds, from land deals to bogus lawsuits.
- Limiting Authority of Trustee – A Trust Protector can monitor discretionary distributions to the Beneficiaries, essentially putting a stopgap on the authority of the Trustee. This is common in Special Needs Trusts where a Trustee might not have all of the tools or all of the knowledge necessary when it comes to handling the very specific needs of certain beneficiaries. It will be also especially important when you, as Grantor, are uncertain about the abilities or long-term honesty of Trustees you may have named reluctantly.
Trust Protector Fees
If the thought of incurring extra fees may keep you from considering a Trust Protector, consider this: Trust Protector compensation is not provided until the Trust Protector has to act, and Trust Protector fees must be reasonable, by law.
Also consider that the typical cost of going to Probate Court to make any change to a trust currently runs about $10,000–and that’s assuming no one objects to the change.
One commonly asked question is whether you can add a Trust Protector to a trust you already have. The answer is yes, if you’ve already written a Trust and didn’t include a Trust Protector, you can go back and have your attorney add a Trust Protector clause.
Why Wouldn’t You Have a Trust Protector?
At our California Estate Planning firm, it is the default policy to recommend a Trust Protector clause in most trusts. We feel the potential benefits and safeguards are too important to ignore.
However, not all Estate Attorneys do so, or even know what “Trust Protector” means!
Of course, if you have a trust that simply leaves instructions to sell off all your stuff and divide the money immediately between the beneficiaries, you don’t really have a “long-term” Trust. In that case, you may not need a Trust Protector… Unless something unexpected happens.
It’s the unexpected element, and the flexibility that a Trust Protector allows, which causes us to recommend naming one even in simple cases, but we certainly wouldn’t insist. It’s the trusts that set up a payout over time, or which are expected to last, which will certainly need changes in an ever-changing future, that we worry about most.