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Many advisors and sophisticated clients have heard of the term "trust protector," but very few know exactly what such a person or entity does or why they should have one in their trust. This article will help define what a trust protector is, outline the uses (and abuses) of naming a trust protector, and provide a general guideline for using them, focusing on standard domestic trusts.
It is difficult to precisely define the position of a trust protector. Black's Law Dictionary does not have a definition for a trust protector. Neither do many treatises on trusts. The concept is certainly well-known, though, if not well defined - especially in the foreign trust arena, where the trust protector is essential to Foreign Asset Protection Trusts.
Tax Management Portfolio describes the trust protector as a third party vested with powers to modify a trust that the grantor is unable or unwilling to retain personally, which may include the ability to change trustees, regulate trust investments, amend the trust, change beneficiaries, change situs or revoke the trust and cause funds to revert to the grantor.
A trust protector is generally someone with a special power over the trust or over the trustee, but with no day-to-day fiduciary responsibilities. The trust protector may also be a committee of several people with such power and may effectively serve as a kind of board of directors overseeing the management of the trust. A trust protector can add flexibility to the trust and serve as a check and balance to trustee abuse. Some trusts may have such a provision, but reference it as a "special trustee" or "independent trustee." Using a trust protector provision may be limited and relatively conservative, or it may be closer to a "bleeding edge" technique. You need to recognize the difference.
First, why do people consider having such a person or power? In three words: control, flexibility and security. People who transfer their hard-earned dollars to a trust for their family often want as much flexibility for the trust as possible without adverse tax or asset protection consequences. Those who execute trusts (a.k.a. settlors, grantors or trustors) cannot generally be trustees or keep the right to amend the trust without...