WHY AND HOW TO USE A TRUST PROTECTOR

by Thomas D. Begley, Jr. Esquire, CELA

What is a Trust Protector?

            When drafting a Trust—particularly an irrevocable trust or a revocable trust that becomes irrevocable upon the Grantor’s death—it is essential to build in mechanisms that allow for future flexibility. Without someone empowered to make certain changes, the Trustee or Beneficiary of an irrevocable Trust may need to seek court approval for even relatively simple updates.

A Trust Protector’s role is to monitor the Trustee’s actions and the Beneficiary’s needs to help ensure the Trust is administered in such a way that the Beneficiary’s needs and the Grantor’s intents are met. A Trust Protector is a disinterested party—independent from the Trustee or Beneficiary—designated in the Trust instrument and given certain powers over the administration of the Trust.

A Trust Protector is distinct from a Trust Advisor or Trust Director.  A Trust Advisor provides guidance to the Trustee regarding distribution decisions or investment strategies.  This guidance is typically non-binding.  A Trust Director may also be appointed and given special powers such as directing distribution decisions or investment management.  These roles are particularly relevant in the context of Directed Trusts.

The named Trust Protector, Trust Advisor, or Trust Director should be appointed in the Trust document and their powers and duties should be very clearly defined by the terms of the instrument to avoid conflict and ambiguity.

Powers of Trust Protector

            A Trust Protector may be granted the following powers, depending on the goals of the Grantor and the terms of the document:

• Remove and/or replace Trustee. This is utilized most often when a corporate Trustee is appointed.  You may want to consider giving the Trustee 30 days’ notice and the opportunity to resign.
• Amend the Trust. This is helpful to effectuate compliance with changes in law, including tax laws, public benefits regulations, etc.
• Review financial records and approve accountings.
• Change the situs and/or governing law of the Trust. This is helpful if the Beneficiary moves to a different state.
• Decant Trust Assets. (While New Jersey does not have a specific trust decanting statute, the practice is permitted under common law.  By exercising a decanting power, the assets are transferred from the existing Trust to the newly created Trust with different terms.)
• Settle disputes between Co-Trustees or Beneficiaries.

Who Should Serve as Trust Protector?

A Trust Protector should be a disinterested party—at least during the Beneficiary’s life.  Family members or close friends can serve as Trust Protector. You may want to avoid appointing remainder Beneficiaries as Trust Protectors due to potential conflicts of interest.  A trusted professional advisor such as an accountant, attorney, or financial advisor can also serve as Trust Protector.

Fiduciary Status

A Trust Protector may or may not be a fiduciary, depending on the terms of the document. If the document clearly states that the Trust Protector is not a fiduciary, then they generally cannot be sued in their role as Trust Protector.

Likewise, a Trust Advisor may or may not be a fiduciary, depending on the extent of their authority.

A Trust Director is almost always considered a fiduciary, even if the Trust says otherwise.

Because fiduciary status affects liability and standards of care, it is important for the Trust document to be explicit on this point.

Providing Guidance

            It is good practice for a Grantor to prepare a letter of intent to the Trustee and Trust Protector. This non-binding document explains the “why” behind the Trust provisions.  It should outline details about the Beneficiary’s life and the reasons why the Grantor has made the decisions expressed in the Trust.

A letter of intent is particularly valuable in special needs planning to help the Trustee of a Third Party Special Needs Trust (TPSNT) better understand the Grantor’s expectations for the use of Trust assets, as well as the Beneficiary’s unique circumstances and needs.

            In special needs planning, a letter of intent is not a replacement for a Life Care Plan.  The process of planning for individuals with disabilities begins with the Life Care Plan that details the needs of the Beneficiary, including a budget and the means for funding the budget.  Ideally, the Life Care Plan would include the amount and manner of funding and may also suggest that the Grantor purchase second-to-die or whole life insurance, if necessary, and long-term care insurance to protect again loss of significant assets that were otherwise intended to fund the Trust.

After the Third Party Special Needs Trust is established and funded, the letter of intent and Life Care Plan provide valuable guidance for the Trustee and Trust Protector, as well as any caregiver or legal guardian of the Beneficiary.