Question:

What is a Trust Protector and how do they work? Are there advantages and disadvantages in setting one in place?

Response:

A “trust protector” is a relatively new category of players in a trust. Trusts have the “grantor” or “donor” who creates the trust, contributes the trust property, and sets the rules of operation, the “trustee” or “trustees” who operate the trust according to the terms of set out in the trust instrument, and the “beneficiary” or “beneficiaries” for whom the trust is been created and administered.

Grantors often reserve certain functions to themselves, such as naming and replacing trustees and reviewing trust accounts. With revocable trusts they can also change the trust. Even with irrevocable trusts, they may be able to change the beneficiaries through a power of appointment. The trust may provide that when the grantor can no longer carry out these functions, that the trustees, the beneficiaries or a third party can do so. For instance, many trusts provide that the law firm that drafted the trust can appoint new trustees if necessary.

A trust protector serves as a way to consolidate these powers in one or more other people. Often the trust protector, who may be a family member, attorney, or other trusted advisor, will have the power to hire and fire trustees, review and approve trustee accounts, and to make changes to the trust as necessary.

This role was introduced as part of offshore asset protection trusts. Various jurisdictions around the world, often small islands such as the Cayman Islands and the Channel Islands between England and France, began changing their laws to permit individuals to create trusts for their own benefit that would be sheltered from their creditors. The laws of these islands require that the grantor give up all control. So the creators of these asset protection trusts created the role of trust protector to give someone the grantor trusts the ability to check on the actions of the trustees and to make changes as necessary.

More recently, this concept has been imported to other trusts, especially special needs trusts where the beneficiaries cannot have control or oversight, often because they don’t have the ability for such roles and because having such power might jeopardize their eligibility for public benefits. The parents who create these trusts plan for them to continue long after the parents are gone and they want an individual or several people they trust to have oversight to make sure that the trusts are managed properly in the best interests of their children. The trust protector role serves this purpose.

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