JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”
To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.
So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.
There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:
- The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
- The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
- Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
- Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.
These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.
A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.
That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.
