What is a Trust Protector Provision, and How Can it Improve Your Trust?

You’ve set up your trust, funded it, and handed the keys to a trustee (or, eventually, to a successor trustee). What happens if the trustee fails you through incompetence or malfeasance? Do you or your ultimate beneficiaries have any recourse given that the trustee controls the trust assets?

While the answer is yes, the legal process of removing and replacing a trustee can be prohibitively time-consuming and expensive, especially for beneficiaries who have no knowledge of trust law. You can plan for the worst now by appointing a trust protector if you fear that your current or future trustee(s) will fail to carry out the trust terms in letter and spirit. We present a case for and against trust protector powers below, but we cannot provide legal advice and urge you to consult your estate attorney for specifics.

What is a trust protector?

A trust protector can be a person or an office (i.e., a role) who is given high-level power over your trust such that the protector may replace a trustee without the need for an expensive, drawn-out legal battle; the protector’s power to remove trustees is memorialized in the trust document itself (and the trustee knows it). Not only may a trust protector have this power, but you can basically give trustee-level powers to a protector, although we will explain below why you might not want to do that.

Trust protector powers

Providing the state where you establish your trust permits it, you can empower your trust protector to:

Remove and replace trustees

Change the trust “situs”

Direct investments and/or distributions

Make changes to the trust to accommodate changing circumstances or laws

Other powers as advised by your estate attorney

The other powers exist because bad trustees might not be your problem. For example, South Dakota offers extremely favorable trust laws. (Click here to read about South Dakota trusts.) What if your trust was established in California? The trust protector may be empowered to change your trust situs, or state whose laws control trust matters so that you can enjoy the most favorable trust regulations.

Laws can also change in ways you never could have foreseen when drafting a trust document with your attorney. If you have passed on control to a trustee and a law change affects the terms of your trust, a trust protector may be empowered to update the trust to keep you in compliance with current regulations.

In addition, your trust can also allow a trust protector to intervene in matters of distributions and investment decisions.

“With great power comes great responsibility”

It may seem like a good idea to give your trust protector veto power over anything the trustees do for the convenience this offers. After all, wouldn’t it just solve so many problems? But your choice of protector either may not be ready to handle these trust “super powers” in the way you would like or else may shy away from taking on the protector role due to liability concerns.

First of all, how do you know the protector wouldn’t change something about your trust that reflected your deepest values because of personal preferences or pressure from the beneficiaries? Times change, and something you insisted upon when drafting the trust may be seen as outdated by the protector. A trustee, on the other hand, must follow the trust to the extent it is legal.

In addition, if the protector begins to direct how trustees are doing their jobs, overrides trustee decisions, etc., he or she is acting as a trustee and may incur fiduciary risk. Normally, when trust protector powers are granted to a person, they do not automatically create fiduciary responsibility. A protector with the ability (but not obligation) to remove the trustee only is not a fiduciary charged with ensuring the terms of the trust are followed. But granting too many powers can change that.

To help shield your protector from fiduciary risk, there is something called a Special Purpose Entity which can provide additional protection in certain states like South Dakota. It allows you to shield a protector from some liability, but to describe the details is beyond the scope of this article and requires an attorney consultation.

Truth to powers

Some advisors recommend placing a statement in your trust that the protector is not a fiduciary, but a facts-and-circumstances test could prove otherwise. It can even be argued that assigning protector powers to an office (rather than a person) implies that the office exists solely to ensure the trustees follow the trust. That is, after all, nearly the definition of fiduciary duty.

Several professionals we consulted recommend limiting protector powers for the above reasons. The key power for a protector is to be able to remove a bad trustee. Beyond that, the protector also might be able to choose someone to take over the protector role. Investment decisions, distribution decisions, etc., are best left to the trustees.

How to add a trust protector

If you have not already formed your trust, or if you are if you are both the trustee and grantor, you can probably just revise the trust to add a protector clause. Consult with your attorney and trusted family members for help choosing someone.

Alpha Fiduciary can help by reviewing your trust document with a professional trust company and provide suggestions for you and your attorney to draft into the document. If your attorney is the trust protector and does not wish to give up this power, then we can refer you to another attorney. However, if the trust is irrevocable, or if you are only a beneficiary, then the process is not so simple, and you may need to petition the court.

Conclusion

To summarize, naming a trust protector with limited powers can be a wise move for posterity, especially if your trust lasts across multiple generations and you are not around to oversee it. The protector can make changing a trustee and trust terms straightforward and inexpensive. We explained reasons you may want to limit protector powers, though, so the protector’s main and possibly only role is to remove/replace a trustee.

If you would like to discuss your personal trust financial situation with someone who understands the needs of trustees and high-net-worth families, please click below to schedule a free consultation.

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory. Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA). Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.