Trust protectors are a result of evolving new developments in the trust industry. The role of a trust protector is still relatively new in modern day trusts. A big difference with a trust protector and a trustee is that a trust protectors’ role might not be specifically defined. Therefore, trust protectors are granted a wide variety of authority over the trust assets. With this power, the question arises if the trust protector is acting in a fiduciary capacity? The short answer, maybe. This depends on the trust and the state law.
What is a trust protector?
A trust protector can be an individual or a group of individuals that is not the settlor, beneficiary, or trustee. Their role occurs in a directed trust. The trust protector’s role, in essence, is to supervise the trustee. If there is a trust protector, then they are appointed by the settlor typically with the trustee. The trustee is given an array of responsibility and power as well. In the past, trust protectors were used most often when there was an offshore account. The trust protectors’ job is to protect beneficiaries from trustees. There have been situations where a trustee has attempted to make money off trust assets, dishonestly. A trust protector can step in and terminated the trustee. Here are a few examples of the duties a trust protector can perform:
- Approve changes in the language of the trust document
- Fire or remove a trustee
- Terminate a trust
- Adjust distributions based on the beneficiaries’ lives
- Add or remove beneficiaries
The language in the trust document gives the trust protector the authority over what they can/cannot do.
What is a trustee?
A trustee is an entity appointed to perform a fiduciary duty to safe guard trust assets. A trustee has control over the trust assets. Picking a trustee is a very important decision that should not be taken lightly. There are multiple types of trustees an individual, independent, and bank. Trustees administer assets or property for the benefits of another. Thanks to the Romans and the creation of “testamentary trusts”, anytime a trust is created you must have a trustee. Here are a trustee’s primary duties:
- Duty of care
- Safeguard trust estate
- Investment management
Trustees differ from trust protectors because of their fiduciary duty to follow the rules outlined in the trust. A trust protector could have the ability to change a trust document as a trustee may not. This will be outlined in the trust document and also depend on where the trust situs is. Some states, South Dakota for example, have decanting statutes that allow individuals to modify or amend a trust document. An irrevocable trust will need this, but a revocable trust will not.
Irrevocable Trust vs. Revocable Trust
There are many different types of trusts, but the basic two types are irrevocable trusts and revocable trusts, also known as a living trust. There is a lot of flexibility with a revocable trust. The owner of a revocable trust can change the terms of the trust at any time. This includes removing beneficiaries, modifying the trust, and removing or appointing a new trustee. The disadvantage is that the owner is not shielded from creditors. The owner still retains control, but after death, the revocable trust will be subjected to state and federal estate taxes.
Irrevocable trusts are the opposite. Once the trust becomes irrevocable no changes can be made to the trust document. This removes these assets from the owner’s estate and he/she will not be subject to estate tax upon their death.
When you need a trust protector?
There are many reasons to why an individual would need a trust protector. The most common reason is if the trust is a Dynastic trust or is going to last for many years. Most of the time a trust protector may not be needed. An estate attorney can help with this issue. A trust protector allows a trust to be more flexible to future law changes. A trust protector will also be useful in the event a future trustee is no longer trustworthy, or is not performing their duties up to a beneficiary’s standards. It is important to note that a trust protector can be anyone. Choosing a trust protector, however, should not be taken likely. It is important to choose someone who is honest, competent, and trustworthy.
South Dakota Trust Protector Statute
South Dakota is one of, if not the, top state for trust law. Its statues on trust protectors gives clear insights into what can and cannot be done. Check out Section 55-1B-8. of the South Dakota statues to see the benefits an individual will have if choosing to use a trust protector. Section 55 -1B-1.1 states, “Governing instrument may provide trust advisor or trust protector with powers and immunities of trustee.” Trust protectors can be given ultimate power if stated in the trust document. Be sure to consult your attorney, make a wise decision, and determine if the trust protector can serve in conjunction with your chosen trustee.