A relatively new player is gaining popularity in estate planning: trust protectors. Naming one can add an additional layer of assurance that a trust’s primary objectives will be carried out long term.
A trust normally has three categories of players:
- The trustors, or creators
- The trustees, who hold the property for the benefit of the beneficiaries, and
- The beneficiaries, who receives property from the trustees according to instructions from the trustors.
Trust protectors are a fourth category that can help the others work together smoothly.
Trust Protector’s Powers
The trustor gives any number of powers or duties to the protector, depending on the circumstances. The role is usually designed to safeguard the trust’s overall purpose and the trustor’s wishes after the trustor dies or otherwise has given up control of the trust. Trust administrations can run into difficulty if, for instance, the terms become outdated, the trustee fails to act in accordance with the terms, or if beneficiaries disagree with how the trustee is doing the job.
If there is no trust protector, the way to resolve these issues is a court proceeding or an agreement among all beneficiaries, or both. Trust protectors can eliminate the sometimes long (and expensive) process of solving problems that come up.
Trust protectors are particularly useful for irrevocable trusts that are designed to last many years. Obviously, the chances of needing a tune-up are high if the trust lasts for decades. But trust protectors also can be a good idea if the trustor anticipates any kind of trouble down the road, such as changes in tax law or family relationships or assets.
In Arizona, Not a ‘Fiduciary’
Arizona has a statute that governs trust protectors (A.R.S. § 14-10818 ). It says that a trust protector is not a “fiduciary” like a trustee. Because of that, the protector is not required to always act in the beneficiaries’ best interest. He or she can protect the wishes of the creator of the trust, even if the course of action isn’t the best thing for the beneficiaries.
When and whether a trust protector can act depends on powers granted under the document. The Arizona statute provides some suggestions (but not limitations):
- Remove and appoint a trustee.
- Modify or amend the trust instrument for any valid purpose or reason, including, without limitation, to achieve favorable tax status or to respond to changes in the internal revenue code or state law, or the rulings and regulations under that code or law.
- Increase, decrease, modify or restrict the interests of any beneficiary of the trust.
- Modify the terms of a power of appointment granted by the trust.
- Change the applicable law governing the trust.
There are some limits. A trust protector may not “[g]rant a beneficial interest to an individual or a class of individuals unless the individual or class of individuals is specifically provided for under the trust instrument.” In other words, he or she can’t ADD whole new categories of beneficiaries. The trust protector also may not [m]odify the beneficial interest of a governmental unit in a special needs trust, which may be entitled to a “pay back” of trust funds for care provided.
The Arizona statute also provides that no particular title is necessary for the statute to apply; any person with powers similar to those in the statute is a trust protector and falls under the statute.
Powers to Suit Many Circumstances
Trustors should customize powers to deal with their specific situation. Trustors should spend some time considering how the trust will work in practice and contemplate adjustments that might be needed. Consider other common powers:
- Settling disputes, whether among co-trustees, or between trustees and beneficiaries.
- Terminating the trust.
- Modifying the powers of trustees
- Clarifying ambiguities in trust terminology.
- Correcting errors in drafting.
- Receiving and/or approving accountings.
- Approving distributions or property valuations.
Trust protectors can be a good way to keep a check on a trustee and beneficiaries. It’s also an alternative to having co-trustees. Trustors often wish to name both a family member and a professional to administer the trust. They want both, but such an arrangement can quickly become unwieldy. If one is the trustee and the other the trust protector, the trustee has the freedom to act without having to seek the co-trustee’s approval, but there’s oversight (and often support) from the trust protector.
Trust protectors can step in and fine tune or solve a problem. They can be just the player you need to keep the trust team working effectively.
