For every trust there is a trustee (at least one). The trustee is the one who manages the assets. Whether the trust is small or large, we have learned at least one thing after hundreds of years of using trusts: Some trustees cannot be trusted. Sometimes this is clear from the beginning, other times it is not clear until some time has passed. So what is one to do?
The back-story: We often describe trusts as boxes into which property is placed and by virtue of which it is managed. The Grantor puts the property in the box and determines what is supposed to happen. The Grantor’s decisions are usually codified (lawyer-fancy-speak for written down) in a Trust Agreement. There are one or more Beneficiaries: they are the ones for whom the property in the box is being managed and/or held. The Trustee does the work of managing and dispersing the stuff in the box supposedly (and usually) in accordance with the Trust Agreement. So…
Act One: The Grantor forms the box (trust), puts stuff in, names beneficiaries and one or more trustees.
Act Two: The Trustee takes over. Often, there is no problem. Most trustees do what they are supposed to do. But sometimes the Trustee get his or her own ideas. Then abuse of the trust may occur. Sometimes this is through simple neglect or negligence. Sometimes the Trustee is well intentioned, but mistaken. Sometimes they are misled by crafty attorneys looking for a buck (which comes from the Trust, after all), investment advisors milking the trust for fees, or a beneficiary or some other party exerting pressure (for a share from the Trust). Sometimes the Trustee just doesn’t understand what is supposed to happen. Other times Trustees steal—on purpose. So is all lost? Shouldn’t be…
Act Three: Traditionally, at this point, someone (usually a beneficiary) would sue the Trustee. But when these are family members, this is ugly. And it is always expensive. And public. And slow. And gives the crafty attorneys from Act Two a great in-road to essentially embezzle money from the Trust. There must be a better way. And there is: in…
Act Four: Enter the Trust Protector, Stage Left. Wearing a black cape and fancy sunglasses, the origin of the concept is debatable and this isn’t a legal history blog. But whatever their source, Trust Protectors became common in the 1980s with the advent of offshore-trusts for U.S. assets (i.e., trusts located on an island somewhere—hence the sunglasses—and used for tax-avoidance and asset protection purposes). Rich people may want to avoid taxes, but usually not at the expense of risking assets disappearing into the island fog. So Trust Protectors became common as a means of removing a Trustee who was found ready to be inexplicably packing his or her bags. In general, as things become common the law around them develops (here Delaware and Alaska led the way), and such has been the case with trust protectors.
What does this mean for you: Well, you may not have an offshore trust. But that doesn’t mean that you shouldn’t consider appointing a Trust Protector. The duties of a trust protector can vary. You outline them in your trust agreement where you name the Trust Protector(s). But in general the trust protector has the power to remove a trustee for misconduct. You may give the trust protector the power to appoint a successor trustee, or you may simply have your trust agreement say that if the trust protector removes a trustee that the successor (whom you named) then takes over. Either way, you have provided a way to remove a trustee who is misbehaving without litigation, arbitration, or any other protracted and costly means. Again, you could give the Trust Protector other duties and powers if you wanted to (like having to sign-off on the sale of a business), but this is the key and most important power. In short, it allows the ‘Trust Protector’ to ‘Protect the Trust’ if something goes wrong.
How does this work: Well, take the most common estate planning trust, the revocable living trust. In most instances, you will be the first trustee. Of course you won’t steal from yourself. So no problem. But you will eventually die (sorry to break the news…). So you have a successor Trustee who then takes over. And though you could name anyone, most people simply make one of the children (an heir/beneficiary) as the Trustee. The problem here is that you can’t predict the future. Maybe by the time you die the new Trustee has developed a drug problem, or maybe the Trustee harbored a grudge against one of the other heirs/beneficiaries and now wants them to get nothing (even though you wanted them to get their share). Without a Protector, the situation is bad. But with a Protector, the new Trustee can be fired.
So who should the Protector be? Like the Trustee, it should be somebody that you place your trust it. But, with some exceptions, the trust document should also limit the Protector’s powers so that the sole, only and exclusive thing that they can do is to fire the existing Trustee (or maybe also appoint a successor Protector). If you have enough faith in the person who will be the Protector, you might also give them the power to appoint the new Trustee. But for a family trust this should normally be avoided lest the Protector appoint somebody under the Protector’s thumb and the two of them together loot the trust.
Where the trust is irrevocable and is meant to additionally serve asset protection purposes, the Protector should also usually not be “related or subordinate” to the person who created the trust (known as the “Grantor”) or of any of the beneficiaries. There are both tax and asset protection reasons for this restriction, and it is for another day.
There is a lot more to the Trust Protector conversation depending upon the type of trust, the assets in the trust, the relationship of the Trustees to the beneficiaries, and other considerations. This is another in the list of reasons why establishing a trust for your loved ones is not the job for your jack-of-all-trades attorney, someone (who is not even an attorney) selling products from some document mill in another state, and certainly not a DIY project over some website. Your family deserves better. It is complicated, but the key is PLANNING. Call or e-mail us today, we would welcome the opportunity to meet with you and help you begin planning for your family’s future.
Image credit: Martin Gommel