A trust protector’s original duty was to fire a trustee should they act out of self-interest or in a way that does not align with their fiduciary duty towards the grantor of the trust (i.e. you). Trust protectors were not commonly an element of American trust law until quite recently and were typically seen in offshore trusts where the risk of malfeasance is higher.
Because of their modern inclusion, it must be noted that there are few provisions or laws specifically dictating the role and definition of a trust protector, and California makes no special mention of trust protectors in its probate code. As such, the trust protector plays a vital yet flexible role that can (and must) be adjusted on a case-by-case basis. Nevertheless, the trust protector’s ultimate purpose has not changed: to guard the guards, so to speak.
What Is a Trust Protector?
To understand the role of the trust protector, it is important to take a step back and understand the anatomy of a trust.
A trust in its simplest form is an agreement between three parties to hold assets “in trust”. One party holds assets in trust on behalf on another party, for the benefit of the third party. Or, in the nomenclature of a trust: the grantor (you) creates a trust, funds it with assets, names a beneficiary, and assigns a trustee to manage it until it has completely passed to the beneficiary.
A single individual can be a trust’s grantor, trustee, and beneficiary – but these are typically three distinct parties, particularly if the goal of the trust is to ensure that the assets funded into it pass onto loved ones and family members without the downsides of going through the probate process.
The issue with putting things “in trust” is that you must trust your trustee. As awkward as that sounds, the gist of the matter is that there may be uncontrollable circumstances in the future wherein your trustee might not act in your best interest or in the interest of your beneficiary, due to a personal grudge, or even plain incompetence.
A trust protector, then, plays the role of the outsider tasked with upholding the trust’s original intent and purpose, by firing the trustee should they act inappropriately while managing the trust. This is where the successor trustee comes into play – another individual (or series of individuals) named as trustee should the first one die or be deemed incompetent, or unfit.
Trust Protector vs. Trustee vs. Trust Advisor
Aside from the grantor, the trustee, and the beneficiary, another potential element in a basic trust is the trust advisor. This is yet another unaffiliated party who is hired by the grantor (usually from a firm that specializes in financial instruments or estate law) to help guide them through the process of creating and managing a trust that matches their specifications and needs.
It is worth mentioning that trusts are a very flexible estate planning tool, and that there are many variations of a trust. Each variation can also be amended to further cater to the unique circumstances of any given case.
Some trusts are designed to last decades. Some serve a multipurpose of transferring wealth between generations while giving back to charity. Some are built to help fund the care and education of a special needs child, ensure that spendthrift heirs aren’t wasting their inheritance, or to finance the care of a beloved pet.
Where trustees manage a trust, trust advisors help build one. The trust protector, in this equation, remains the vigilant individual in charge of ensuring that a trustee manages the trust in the way the advisor and grantor intended.
When Is One Needed?
Trust protectors play a greater role in long-term trusts, such as dynasty trusts, wherein the grantor’s ability to keep an eye on the situation has long since become irrelevant. In dynasty trusts, for example, the grantor is asked to pick a trustee who will oversee the trust for decades to come.
However, the future being as uncertain as it is, any number of personal or financial changes might affect a trustee’s reliability and conduct. That is where the trust protector steps in to take care of the issue. Similarly, trust protectors may step in to cut short disputes between trustees and beneficiaries, acting as an impartial third party between the two to reduce the losses incurred by the trust due to potential litigation.
If you are ever in a position where you believe there is even the slightest chance that your trustee may act in their own self-interest, particularly if the element of trust is not entirely there, or if the temptation might be too great (for very large estates and trusts), a trust protector may end up being a vital element in ensuring that your trust is managed and distributed in the way you originally intended, without needless litigation and additional costs and fees.
The Role Is Not Clearly Defined
As mentioned previously, the role of the trust protector is not clearly defined. This is important, because one of the central issues regarding the usage of trust protectors is whether they have a fiduciary duty to the grantor, the trust, and the beneficiaries.
California makes no special note of a trust protector’s duties in its probate code. States under the Uniform Trust Code do note that a trust protector’s duties are fiduciary in nature if they possess the “power to direct”. This definition, however, does not apply in all states, and some argue it is vague.
As such, it is up to the trust document to clearly define the role and authority of the trust protector, as well as their compensation, and the nature of their role (and whether they bear responsibility towards the trust, its grantor, and its beneficiaries). This is where it becomes critical to work with an experienced professional to create a trust.
Picking Someone as a Trust Protector
The most important thing is to ensure that there is no link between your trust protector and your choices as trustee. A trust protector is ideally impartial, and any conflict of interest would defeat the point of appointing someone to remove a trustee for any sort of fraudulent or incompetent behavior, from something minor to drawing out the trust for greater fees, to something as unlikely as making off with the assets themselves.
When planning to appoint a trust protector, it pays to work with a professional and go over the pros and cons, as well as clearly formulate the trust protector’s role in your trust.