Trust Protectors: Right for My Trust?
A protector can also be helpful if you believe there may be conflict among the beneficiaries and the trustee, or if you don’t fully trust the trustee to fulfill your wishes.
A trust can be an essential tool in your estate plan. First and foremost, it avoids probate and, consequently — Court supervision. For most families, that is a great thing. Privacy, speed, and cost savings in avoiding probate can be considerable. But what if the Trustee you pick doesn’t do their job? What if they make poor investment choices or refuse to distribute trust assets as directed in the trust? What if the law changes? Even more likely, what if one of your beneficiaries find themselves unable to accept an outright bequest from your trust because of their financial problems, such as a bankruptcy, foreclosure, or anticipated divorce?
These are all situations that we see too often. The trust is outdated, and the selection made as Trustee doesn’t work out the way the trustmakers envisioned.
A Trust Protector may be a terrific option for many families who already have a trust or are creating a trust. First, a little background.
The Michigan Trust Code
In 2010, Michigan adopted the Michigan Trust Code, a series of laws establishing the first real set of unique rules for the creation and administration of trusts. Before that time, trusts were governed by laws that had been created to enforce either contracts or wills. This was a huge step forward for trusts in Michigan and a sign that trusts are here to stay as an estate planning tool for everyday folks.
One of the more interesting changes that the Michigan Trust Code brought with it was the first formal recognition of Trust Protectors.* A Trust Protector is someone who is appointed to watch over a trust that will be in effect for a long time and ensure that it is not adversely affected by any changes in the law or circumstances.
What is a Trust?
Let’s start with a short explanation of trusts. The concept of a “trust” is fundamentally very simple: One person holds legal title to an asset for another. If I transfer the title of my family farm to you and say, “Hold this land for the benefit of my family while my wife and I are out of the country,” then trust has been created.
A trust typically has four components:
Trustmakers. These are the people who create the trust.
Trust assets. This is the property in the trust.
Trustees. The people in charge of the trust. Usually, the Trustmakers until their deaths, then whoever they appoint, but most often an adult child.
Beneficiaries. The people who receive the trust assets.
Whatever powers the trust protector has, you should be as specific as possible in the trust document.
Trust Protectors
Now, enter the concept of the Trust Protector. The idea behind the Trust Protector is to have somebody who can watch over the Trustee, and terminate the Trustee for any misconduct. Originally, that was the only power the Protector had: Fire the Trustee. Nothing more, nothing less.
But the role of the Trust Protector has evolved with trusts. You can name a trust protector in your trust document, which will also dictate the trust protector’s powers. Here are some powers that a trust protector may be given:
Remove and replace a trustee
Allow the trust to be amended due to changes in the law
Resolve disputes between trustees (if there are more than one) or between beneficiaries and the Trustee (s)
Change distributions from the trust based on changes in the beneficiaries’ lives
Allow new beneficiaries to be added if there are additional descendants
Veto investment decisions
Now, these are very broad powers. Therefore, the decision to include them in your trust should not be taken lightly. Even more important is selecting the right person. However, you can customize exactly how much power you want your Protector to have.
Reasons to have a Trust Protector
There are a number of reasons for appointing a trust protector. Having a protector allows a long-term trust to be more flexible and adapt to factual and legal changes. For example, beneficiaries may get divorced or die prematurely, or the law may change. A protector can also be helpful if you believe there may be conflict among the beneficiaries and the Trustee, or if you don’t fully trust the Trustee to fulfill your wishes.
Whatever powers the trust protector has, you should be as specific as possible in the trust document. The more specific you are, the more likely your wishes will be carried out. An attorney can help you ensure that the trust protector does not have too much power.
Who Should We Appoint?
Technically, anyone can serve as a trust protector; however, it is a good idea to appoint an independent third party rather than a family member or a beneficiary. A lawyer or accountant may be a good choice for some families. I often recommend that clients appoint a trusted family member who is NOT a beneficiary under the terms of the trust. For example, if a couple had 3 children, and they were the beneficiaries, and 1 of those children was also the successor trustee (the Trustee who acts after the death of the parents), then a good choice for trust protector might be an uncle or aunt of the children. They won’t receive anything from the trust but can act with an independent eye and help supervise the administration of the trust.
The Trust Protector’s job is to act on behalf of the original trustmakers, and modify the trust only to the extent necessary to solve the problem.
What a Trust Protector Does
Most Trust Protectors have a very limited role. I suggest to my clients that when we begin administering the estate (that occurs immediately after the death of the last trustmaker) that the Trust Protector simply receives the same account statements for all banking and investment accounts, directly from the bank or financial institution. The Protector is there to provide oversight, and only really acts to resolve disputes.
Each trust beneficiary is instructed to deal directly with the successor trustee. If they have an issue, such as those outlined in this article, then they can ask for the help of the Trust Protector.
What a Trust Protector Doesn’t Do
The Trust Protector is not there to make small decisions or participate in the actual trust settlement. That is the job of the Trustee. I often explain to clients that it is the Trustee’s job to consolidate the estate and divide it according to the terms of the trust. The Trustee must also sell all non-liquid trust assets and divide the proceeds according to the trust terms. They are even responsible for cleaning out the sock drawer.
The Trust Protector is only there if problems arise. The Protector should never have a direct interest in the trust. They should almost never act to modify the instructions contained in the trust. On the rare occasion that a modification is necessary, it is typically because the trust language didn’t anticipate an unusual event. The Trust Protector’s job is to act on behalf of the original trustmakers, and modify the trust only to the extent necessary to solve the problem.
Conclusion
Trust Protectors are not for every family that creates a trust. They are best implemented as part of an already well-written estate plan. But for families that want the advantages of a trust, and already know that there might be an issue that will challenge the Trustee when it comes time to settle the estate, they can help keep peace and ensure your wishes really are followed.
Adding a Trust protector to your existing trust is a very easy process. I usually meet with the clients, review the trust, discuss the optional powers you want your Protector to have, and have you sign the trust amendment during that same appointment. The amendment creating a trust protector is usually only a few pages long.
*MCL 700.7809 now governs the creation of Trust Protector and defines their powers and liability.
