What is a Trust Protector?
A trust protector is a person who has the authority to direct the actions of the trustee or trustees of an irrevocable trust. A trustee generally has broad sweeping authority to invest funds and distribute income and principal. In contrast, trust protector has limited authority to give instructions to the trustee in specifically defined areas. Trust protectors have long been used in offshore asset protection trusts, but are increasingly being used to safeguard domestic trusts.
What Can A Trust Protector Do?
A common power given to a protector is the ability to change trustees. This allows the protector to remove a trustee who does not follow the wishes of the beneficiary and appoint a new trustee who is more cooperative.
A protector may also have the authority to prevent the trustee from making distributions from a trust. This power may be useful if creditors are attempting to attach assets of the beneficiary. It may also be useful if the beneficiary is involved in a divorce or has other financial problems. A protector may be in a better position to address problems that arise in the personal lives of beneficiaries. This is especially true if the trustee is a corporation or bank. For example, a protector may be aware that a beneficiary has a drug or alcohol problem and take necessary steps.
It is common for parents to name their children as co-trustees. If two trustees disagree on proposed action, the protector may be available to break the tie and eliminate veto power inherent in a two-trustee situation.
Who Can Act as a Trust Protector?
The best choice for a protector is an individual who understands the wishes of the persons creating the trust and who knows the family dynamics of the beneficiaries. A corporate trust department is generally not a good choice.
Is The Protector Liable for Actions?
A trustee is liable for his or her actions and the trustee’s personal assets may be available to satisfy that liability. Because protectors are a relatively new concept in domestic trusts, there is little legal precedent in this area. A frequent area of litigation regarding breach of trustee duty involves investment of trust assets. If the protector is not responsible for making investment decisions, this liability is not present. If the protector can simply block distributions, the liability seems to be fairly minimal. If a beneficiary feels blocking the distribution was an error and prevails on a claim in court, the remedy is to simply allow the distributions, not force the protector to use his or her assets to pay back the trust. While it is unclear how much liability attaches to the power to change trustees, it is certainly conceivable that beneficiaries could sue a protector for the actions of a trustee that was appointed by the protector.
Can you benefit from a trust protector? Contact me at 415-781-4000 to find out.