What is a Trust Protector or Trust Advisor?
March 20th, 2023
With the growing popularity of trusts in estate planning, including trusts that may last for two or three generations, creators of trusts may be concerned about how to ensure their intentions for the trust are honored. A trust protector or trust advisor may be the answer.
How Does a Trust Operate?
To understand the role of a trust protector, you need to first understand what a trust is and how it operates. In a nutshell, a trust is a legal relationship created by a document called the trust document or trust instrument. There are three parties to this relationship:
- Creator of the trust - who may be referred to as the settlor, grantor, or trustmaker
- Person who manages the trust - called the trustee
- People who benefit from the trust - called the beneficiaries
There are different types of trusts created for different purposes. Some are relatively brief in duration. For example, in many living trusts, the trustmaker also acts as the trustee and beneficiary during their lifetime. After their death, a successor trustee takes over administering the trust, and often distributes the trust assets to “remainder” beneficiaries. The trustmaker names both the successor trustees and the remainder beneficiaries in the trust document.
However, some trusts, such as Ohio Legacy Trusts and certain other irrevocable trusts, may last for decades. A trust protector is a person, or more commonly, an entity, with the power to oversee a trust that is intended to be in effect for a long time. The trust protector ensures that unforeseen changes to circumstances or the law do not negatively affect the trust’s ability to carry out its intended purposes.
What is a Protector’s Relationship to a Trustee?
In essence, the trust protector’s role is to supervise the trustee and act as the trust maker would if they had the ability. For example, they might remove an existing trustee, appoint a new trustee, add beneficiaries to the trust, or modify the trust terms to reflect a change in the law. The trust protector role is different from that of a trustee, but like a trustee, the protector is appointed in the trust instrument. Their powers are also defined in the trust instrument, as well as in applicable state law.
Successor trustees are often family members of the trust maker and may also be beneficiaries of the trust. By contrast, a trust protector is an independent third party who is unrelated to the trust maker or beneficiaries and has no interest in the trust. The protectors may be individuals, law firms, accounting firms, or institutions with special knowledge or training. An institutional trust protector is a good choice for a trust that is designed to last for a long time, because the trustee doesn't have to worry about an individual dying, moving away, or becoming incapacitated.
When Does a Trust Need a Trust Protector?
There are a variety of circumstances in which having a trust protector might be a good idea. Think of it from the perspective of a person who is creating and funding a trust. Together with their estate planning attorney, the trustmaker identifies their goals for the trust as well as the people they want to benefit from the trust. They try to choose a qualified trustee who will act wisely and responsibly. But even the most visionary trustmaker and attorney cannot predict and plan for all possible contingencies, which might include:
- Afterborn or undiscovered family members whom the trust maker would likely want to be beneficiaries of the trust
- A successor trustee who becomes incapacitated or dies unexpectedly, or who breaches their fiduciary duties
- The trust maker is not fully confident that their successor trustee will abide by their wishes
- A trust contains complex assets which the trustee lacks the specialized knowledge to manage without additional guidance
- A change in estate tax law which makes the trust as written no longer as favorable to protect assets from taxation as when it was drafted
- A beneficiary of a special needs trust moves to a new state with different laws, making the trust as written no longer as effective to protect their assets
- A beneficiary of the trust dies prematurely or gets divorced
- A trustee’s discretionary distributions of trust income to beneficiaries needs to be limited for asset protection purposes or to protect the eligibility of a beneficiary with special needs for government benefits
- A successor trustee who is also a beneficiary becomes a judgment debtor; they may need to be removed as trustee to protect their share of trust assets from judgment creditors.
- Disputes arise between trustees (if more than one) or between a trustee and beneficiary.
In these and other situations the trust protector has the power to make changes to the trust that will give effect to the trustmaker’s intentions. Otherwise, the terms of the trust would have to be carried out as written, even if they are no longer effective to carry out the goals of the trust.
What is the Difference Between a Trust Protector and a Trust Advisor?
The terms “trust protector” and “trust advisor” are often used interchangeably. However, some states’ laws distinguish between them, with a trust advisor being defined as third-party decision makers with the authority to control how a trustee exercises their powers. A trust protector may have responsibility for certain non-administrative trust decisions that are not inherently a part of the trustee’s role.
Is a trust protector a fiduciary? The answer isn’t always clear. Ideally, the trust document will specify whether the protector is to be considered a fiduciary (someone who is obligated to act in the best interests of another party, such as a trust’s beneficiaries).
A trust protector who does not have the same power over a trust as a trustee does probably should not be treated as a fiduciary, but this is an issue to discuss with your estate planning attorney when establishing your trust. If you do decide to treat them as a fiduciary, their fiduciary duties should be clearly specified in the trust document.
To learn more about trust protectors, their potential powers and duties, and whether you should have one for your trust, contact Gudorf Law Group to schedule a consultation.