Trust Protector

The use of an irrevocable trust is probably one of the most effective estate planning strategies.  A primary advantage is they allow you to remove significant amounts of wealth from your taxable estate while at the same time retaining the right to receive an income stream.

One of the big drawbacks to using an irrevocable trust is the concern that changing tax laws or circumstances may affect your original objectives.  The big question is how flexibility can be built into the trust.  One solution is to appoint a trust protector or special trustee.

The relinquishment of control over the trust is the only effective way for an irrevocable trust to avoid estate taxation.  This means the trustor cannot act as trustee, retaining powers to amend the trust’s terms, change beneficiaries, take back trust property, or otherwise benefit from the trust in any way.

The use of a trust protector allows the trust to be drafted in such a manner that the trust protector has the power to amend the trust and take other exceptional actions, thereby insuring the trust continues to fulfill the grantor’s wishes.  By giving the trust protector powers that you personally would like to retain but cannot due to adverse estate tax consequences, you are in essence building in the flexibility for change.

Suppose the trust provides that your daughter is to receive a share of the trust assets at age 30.  As that date approaches, you begin to worry that she may not be able to handle the money due to a lack of maturity.  You discuss this with your trust protector, who shares your concerns, and subsequently amends the trust to delay the distribution until your daughter turns age 40.  This is just one of many examples whereby the granting of various powers to the trust protector creates the desired flexibility within the irrevocable document.

The trust protector may have a broad range of powers, including but not limited to the following:

  • Amending the trust to reflect changing circumstances of the trust or its beneficiaries;
  • Amending the trust to comply with changing tax laws;
  • Expanding or limiting the trustee’s powers;
  • Removing or replacing the trustee;
  • Changing the trust’s governing law or jurisdiction;
  • Terminating the trust;
  • Directing or vetoing investment decisions;
  • Changing beneficiaries;
  • Consenting to the exercise of a power of appointment;
  • Modifying the trust’s provisions regarding disposition of income and principal.

One must resist the temptation to give the trust protector every allowable power.  Too much power can be dangerous, particularly if it involves changing beneficiaries, modifying powers that may alter beneficial interests in the trust, or modifying dispositive terms.

Theoretically, you could appoint almost anyone to act as your trust protector.  However, in an effort to make sure the trust achieves your estate planning objectives, one must choose an independent trustee.  In order to do this, one must avoid naming trustees, beneficiaries, spouses or other members of the immediate family as the trust protector.  It is always best to name someone you trust who has the skills and judgment needed to carry out your wishes.

The benefits of an irrevocable trust, which allow you to remove substantial amounts of assets from your taxable estate while still receiving an income stream, can be very alluring.  However, the one drawback is that one must relinquish control over the trust assets.  The use of a trust protector will allow you to maintain some control without losing the estate planning benefits.