United States: Benefits Of A Trust Protector

Making changes to an irrevocable trust can be difficult. Even minor or administrative changes can require court approval and consent of all beneficiaries to the trust. Many states, including Missouri and Illinois, have addressed this by codifying a new role for trusts known as a "trust protector."

What is a Trust Protector?

A trust protector is a third party with certain powers over a trust to ensure that the grantor's wishes are effectively carried out. Generally, it is advisable that the trust protector be someone independent from the grantor and beneficiaries.

A trust protector's authority is limited to the powers granted in the trust instrument. Examples of powers that may be held by the trust protector include:

• the power to remove and replace a trustee;
• the power to modify the powers of the trustee;
• the power to change the situs or legal jurisdiction of trust;
• the power to modify the trust instrument to incorporate tax planning or change in the law;
• the power to correct errors or clarify language used when the trust was created;
• the power to terminate the trust; and
• the power to amend the trust to modify the interests of trust beneficiaries.

While state statutes often allow trust protectors to exercise broad authority, it is important to note that the trust protector only has powers expressly provided in the trust instrument. This allows grantors to design trust protector provisions that reflect their level of comfort. For example, a grantor may provide a trust protector with authority only to remove and replace a trustee and amend the trust to incorporate tax planning or changes in the law.

Advantages of Including a Trust Protector

Flexibility. It is difficult for a grantor to predict the needs and circumstances of beneficiaries many years into the future. If given proper authority in the trust instrument, a trust protector can make changes to help meet the needs of beneficiaries.

• Beneficiary with Special Needs. If a beneficiary has special needs and would otherwise qualify to receive public benefits, the trust protector can make changes to the beneficiary's share to preserve their right to receive public benefits.
• Merger of Trusts. Beneficiaries of more than one trust established by a grantor often want to combine such trusts for ease of administration. There are specific statutory requirements for merging trusts, and a trust protector can make administrative changes to allow trusts to be merged.

• Appoint Successor Trustees. In the event that no successor trustee is able or willing to serve, a trust protector can appoint a successor trustee to avoid the need to involve the court in appointing a new trustee.

Tax Planning. A trust protector can modify provisions in the trust to accomplish income and estate tax planning for beneficiaries. This powerful tool can help beneficiaries minimize potential tax liabilities.

Changes in the Law. A trust protector can amend the trust to address changes in the law. For example, there have been numerous changes to tax laws and regulations in recent years. A trust protector is able to adapt the trust to take advantage of any tax benefits and minimize any adverse tax consequences.

Avoids Need for Court Involvement. Changes to irrevocable trusts typically require agreement between trustees and all beneficiaries. In many circumstances, changes to the trust require court approval. Court action to modify a trust usually requires the involvement of lawyers and can take several months or longer to resolve. A trust protector can take swift action without the need for court approval or agreement of all beneficiaries.

To determine whether a trust protector makes sense to include and what scope of authority is appropriate for the trust protector, the grantor should consult an estate planning attorney for a more detailed analysis.