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When one trustee isn’t enough, consider appointing a trust protector

Posted On: APRIL 2024

Irrevocable trusts can allow for the smooth, tax-advantaged transfer of wealth to family members. But there’s a drawback: When you set up an irrevocable trust, you must relinquish control of the assets placed in it. What you can control is who will eventually oversee distribution of assets after your death.

However, sometimes — particularly when the trust creator isn’t completely confident that the trustee will carry out his or her wishes — one trustee isn’t enough. That’s when you might want to consider appointing a trust protector.

Board/CEO relationship

A trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.

There’s virtually no limit to the powers you can confer on a trust protector. For example, you can enable a trust protector to:

  • Replace a trustee,
  • Appoint a successor trustee or successor trust protector,
  • Approve or veto investment or beneficiary distribution decisions, and
  • Resolve disputes between trustees and beneficiaries.

A word of warning: Although it may be tempting to provide a protector with a broad range of powers, this can hamper the original trustee’s ability to manage the trust efficiently. Keep in mind that the idea is to protect the integrity of the trust, not to appoint a co-trustee.

Exercise of discretion

Trust protectors offer many benefits. For example, a protector with the power to remove and replace the trustee can do so if the trustee develops a conflict of interest or fails to manage the trust assets in the beneficiaries’ best interests.

A protector with the power to modify the trust’s terms can correct mistakes in the trust document or clarify ambiguous language. Or a protector with the power to change the way trust assets are distributed, if necessary, to achieve your original objectives can help ensure your loved ones are provided for in the way you would have desired.

Wise choice

Choosing the right trust protector is critical. Given the power he or she will have over your family’s wealth, you’ll want to choose someone whom you trust and who’s qualified to make investment and other financial decisions. Many people appoint a trusted advisor — such as an accountant, attorney or investment advisor — who may not be able or willing to serve as trustee but who can provide an extra layer of protection by monitoring the trustee’s performance.

Appointing a family member as protector is also possible, but it can be risky. If the protector is a beneficiary or has the power to direct the trust assets to him- or herself (or for his or her benefit), this power could be treated as a general power of appointment, potentially triggering negative tax consequences.

Powers and duties

If you decide you’d like to have a trust protector, please contact us and we can draw up documents that clearly define this individual’s role and authority. We will be able to explain a protector’s customary powers and duties, but you should also bring up specific scenarios that you want to protect against.

© 2024