Maybe you know enough about estate planning that you're already familiar with trusts, but you've heard someone mention a “trust protector” and you're not quite sure what that is. A trust protector is just what it sounds like—an independent third party or institution that's has the authority to perform certain duties with regards to a trust.
The purpose of having a trust protector is to have someone whose job it is to make sure that your wishes, as the person who made the trust, are followed. Usually, the trust protector's responsibilities and authorities will be explained in the trust agreement.
What Does a Trust Protector Do?
Usually, you hear about a trust protector in connection with an irrevocable trust. For the most part, irrevocable trusts cannot be altered or changed without difficulty. Once a trustmaker has established an irrevocable living trust, he or she cannot later change their mind and undo it, or reclaim the property they placed into the trust.
If there is an emergency situation, only the trust protector has the power to take action concerning the trust that will make things right. An example of this might be the rapid changes in the economy that happened recently during the COVID-19 pandemic. If a trust was set up in a way that it's now rapidly losing a lot of money, the trustmaker will not be able to do anything to fix the situation because the trust maker has given up all control. The trustee will also not be able to reform the trust as his powers are limited in that regard. Only the trust protector will have the ability to take action to protect the assets in the trust.
However, not all trust protectors have the same rights and powers. A trust protector may be authorized very limited powers or sweeping powers, it just depends on what the trustmaker decided when the trust was established. Generally, a trust protector will always have the power to remove and replace the existing trustees. Sometimes a trust protector will have the power to settle disputes among co-trustees, or between trustees and beneficiaries. The ability to intervene in a situations such as broad economic changes or the implementation of new tax laws may be granted to some trust protectors and may not be granted to others.
Typically, the trust protector will be granted more powers when the trust is expected to last for a very long time. These are called dynasty trusts and they can last for many, many years after being established. Logically, the longer a trust exists, the higher the chance that a situation could arise that requires the trust protector to intervene and make changes to the trust. A trust protector in Tennessee could be needed to:
- Remove and replace a trustee
- Modify the powers of the trustee
- Change the situs or legal jurisdiction of the trust
- Terminate the trust entirely, or
- Correct errors or clarify language that was used when the trust was created
- Veto distributions to certain beneficiaries by the trustee
- Review and approve trustee reports and accountings
In some states, a trust protector can do all of these things without court approval, but in other states, a court will have to approve the changes.
Who Can Be a Trust Protector?
Under Tennessee law, a trust protector can name a close relative or friend who you trust. You do not necessarily have to have a bank, trust company, or independent third party to serve. Additionally, you can appoint more than one trust protector, and actually have a committee serve together in this role. However, note that it would not be a good idea to name a beneficiary as a trust protector as this position should inherently be independent and not be entangled in any sort of conflict of interest. Note that the acting trustee cannot serve as trust protector for trusts administered pursuant to Tennessee law.
Sometimes the documents that are used to form the trust will appoint someone to be the trust protector, but other times the trust agreement will only explain the process for appointing a trust protector. For example, if the person who made the trust is married, the trustmaker's spouse may be granted the power to appoint someone to be the trust protector.
If a trust protector is not named in the trust agreement, the trust beneficiaries can appoint someone. Courts also have the power to appoint a trust protector if warranted or needed in certain situations. If a specific person is named in the trust agreement, there should also be language that says how that person should be replaced if they are unable or unwilling to be the trust protector when they are called.
What's in it for the Trust Protector?
Though we'd love to think that someone would take on all these duties out of the goodness of their heart, being a trust protector can be a lot of work. That's why a trust protector is entitled to be compensated for the work they do. A method for determining how much a trust protector should be paid should be included in the trust agreement.
If you're still not sure if you need a trust protector, or if you want to talk through how to select one, contact our office and we can talk about it with you and explain the process.