If you know anything about trusts, you have likely heard of the roles of settlor (aka grantor), beneficiary, and trustee. But there’s another role to know about: the trust protector.
Let’s look at what a trust protector is, who can be a trust protector, and the advantages and disadvantages of appointing one for your trust.
What is a Trust Protector and What Does a Trust Protector Do?
A trust protector, or simply “protector,” is an individual or entity whose primary role is to ensure the trust is being carried out in accordance with the settlor’s original wishes. Trust protectors were most commonly seen in asset-protecting offshore trusts in the 1980s and 1990s, but they have since become more popular for all kinds of trusts in the U.S. and many other nations.
What does a trust protector protect against? Depending on the circumstances, the trust protector may protect the trust from various threats or risks including trustee misconduct, mismanagement, or incapacity; disputes among beneficiaries and/or trustee(s); changing laws that adversely affect the trust; ill-advised financial decisions; and more.
Common powers and responsibilities may allow a trust protector to:
- Oversee trust administration to ensure it’s in compliance with applicable laws and with the settlor’s wishes
- Require trustee to get trust protector’s consent before taking certain actions such as investing or distributing funds
- Modify the trustee’s powers
- Remove or replace trustees
- Change the beneficiary or beneficiaries
- Adjust as needed in response to changing circumstances
A trust protector may have all or some of the powers listed above, and more. The exact powers and responsibilities are enumerated either in the trust instrument itself or in a separate document.
Who Can Be a Trust Protector?
In theory, anyone of legal age who is mentally competent can be appointed trust protector, other than a trustee. Even the settlor/grantor may serve as the trust protector (and often does). Entities such as banks, law firms, and corporations may also serve as trust protectors.
In practice, it can be challenging to find the right individual or entity to effectively fill the role. The ideal candidate should have the right experience and knowledge, including knowing relevant state and federal laws, tax and reporting requirements, and the trustee’s powers and responsibilities, for a start. A trust protector should also be an impartial third party with no conflict of interest, meaning the individual or entity should not have any financial stake in the trust or how it’s handled.
Above all, a trust protector should be someone the settlor can rely on to carry out their wishes, which is why settlors often select a family friend or close acquaintance whom they trust implicitly.
Does Every Trust Need a Trust Protector? Advantages of Appointing a Trust Protector
No, not every trust needs one, but we strongly recommend a trust protector in the following situations:
- A troubled beneficiary. If the beneficiary has issues with drugs, alcohol, or excessive spending, a trust protector – such as a family friend or counselor – can be helpful in finding the right trustee to handle the trust. The two can work together to ensure the trust is not misused.
- Specific investments. A grantor may wish to appoint a trust protector to help direct the investment of trust assets in a particular “family way” that the trustee might not be familiar with.
Outside of these specific circumstances, here are just some of the main advantages of having a trust protector that any trust can benefit from:
Flexibility to respond to changing circumstances. Changes in family/beneficiary situations, tax code, and estate planning laws can adversely affect a trust. Trust protectors have powers trustees don’t (and legally cannot) have that allow them to alter the trust in response to new circumstances. This can reduce tax liabilities and ensure the trust reflects the settlor’s wishes long after the settlor is gone.
Oversight over the trustee. Trust protectors can also serve as an additional layer of protection against mismanagement by the trustee(s). This is more important than ever, as the powers of trustees have grown over time. Oversight by a third party (the trust protector) can help prevent intentional or unintentional mishandling by the trustee(s) that can harm the beneficiaries’ interests and endanger the trust.
Conflict resolution. Trust protectors can also act as informal mediators when disputes arise. Beneficiaries may fight among themselves, and trustees and beneficiaries often have competing goals, which can lead to strife and litigation. (Read about how one such conflict ended up in the SC Court of Appeals here on our blog.) A skilled trust protector can step in at the first signs of conflict and resolve the matter amicably, potentially avoiding litigation and strained relationships.
Depending on your circumstances and goals, you may gain additional advantages by appointing a trust protector for your trust. This is something to speak with your estate planning attorney about.
What if you didn’t appoint a trust protector in the original trust document? That’s not a problem. A settlor can add a trust protector later.
Downsides of Having a Trust Protector
What are the risks and disadvantages of having a trust protector? Some possible downsides include:
Higher fees. Not all trust protectors are compensated for their role, but some are. Trust protectors who are fiduciaries (with a fiduciary duty to the beneficiary or beneficiaries) are typically compensated. Depending on the terms of the trust, having a trust protector can be expensive and can diminish the trust’s assets.
Potential for challenges. Trusts have been around for centuries, and by now the roles and responsibilities of the grantor/settlor, trustee, and beneficiary are clear. But the role of trust protector is relatively new, and relevant case law in South Carolina is sparse. The potential for lawsuits and legal challenges over a trust protector’s actions shouldn’t be ignored.
Needless complexity. A trust protector may end up bringing conflict, indecision, or poor judgment to the situation. This is why it’s crucial to take the time to select the right trust protector. No trust protector at all is better than an ineffective and incompetent one.
For Help with Trusts and Estate Planning, Call the Gem McDowell Law Group
Trusts are excellent instruments for estate planning, but they can be complex. For help creating or amending a trust, or for advice on appointing a trust protector for your trust, talk with Gem McDowell. Gem helps individuals and families in South Carolina create estate plans tailored to their unique circumstances and wishes. He’s also a problem solver who can help you tackle tricky family or inheritance situations and avoid mistakes.
Call Gem and his team at their Myrtle Beach or Mount Pleasant, SC office today to schedule your free, no-obligation consultation at (843) 284-1021, or reach out to us through this form.
