Advisor Connections Newsletter™
January 26, 2016
Trust Protector: The Ace Up the Sleeve
Trust Protector: The Ace Up The Sleeve
Joseph M. Ferraro
Arguably the biggest challenge in estate planning is managing change—and we all know the only thing constant is change. In estate planning, changes come in many different flavors, and often need to be reflected in the documents. Changes in the law, changes in the family, and changes in the finances can all have a significant impact on the likelihood of an existing plan meeting the goals and expectations of an individual.
Consider the following examples of changes that may be encountered, which would likely necessitate modifications to be made to an estate plan:
The failure to manage change is often the downfall of a plan and regularly leads to unanticipated consequences, whether it is additional taxes, unintended distributions, family fights, or added expenses and delay in the settlement process (for both disability and death).
For individuals and families who have created revocable living trusts as part of their estate plan, their power to modify, amend, and revoke their trusts is clear, so long as they are alive and well. Issues such as whether they know when the documents need to be updated and how much it will cost them are a best left for a separate discussion on the importance of estate planning maintenance.
However, when circumstances change after an individual becomes disabled or dies, and their trust becomes “irrevocable,” modifying the document to reflect their planning intentions becomes more difficult.
Use of Trust Protectors
An increasingly used strategy to manage change and modify a trust after the settlor dies or becomes disabled is to appoint a “trust protector.” Most commonly, a trust protector is an independent third party who is given powers by the settlor to make certain modifications to the trust document that are consistent with the planning goals and objectives of the settlor. These powers are typically meant to be exercised when unanticipated changes in circumstances frustrate the settlor’s planning intentions, as opposed in the day-to-day functions of trust. The trust protector’s powers are provided in the document, and may include the power to:
The applicability and powers of a trust protector vary greatly from each trust, so it is difficult to generalize the trust protector’s powers in a single definition. However, it is clear that without the settlor including trust protector language in their trust, the options for making changes to the document after they pass away are limited to court involvement or private settlement agreements which would require the written consent of all trustees and beneficiaries. Most often, these options are expensive, uncertain, or otherwise impracticable.
Having a process for appointing a trust protector in the trust is an incredibly useful strategy that adds flexibility and protection to the plan, even after the settlor dies. It can be used to safeguard the settlor’s wishes, avoid adverse tax consequences, protect a beneficiary’s inheritance, or improve trust administration. All trust-based estate plans should be reviewed to ensure that trust protector language is included and properly drafted. Remember, a trust protector can only be used if the trust agreement specifically addresses it.