Designing an estate plan can be a delicate balancing act. On the one hand, you want to preserve as much wealth as possible for your family by protecting it from estate taxes and creditors’ claims. But, on the other hand, you still want to control your assets during your life.

Unfortunately, these two goals often conflict with each other. Generally, the most effective way to remove wealth from your taxable estate and shield it from creditors is to place it in one or more irrevocable trusts. But, as the name suggests, an irrevocable trust requires you to relinquish control over the trust assets. One potential solution to this problem is to appoint a trust protector.

Trust protector’s duties

A trust protector is often compared to a member of a corporation’s board of directors. A trustee manages the trust’s day-to-day affairs. In contrast, the trust protector serves in an oversight capacity to prevent trustee mismanagement and participate in significant decisions.

The trust document outlines a trust protector’s specific powers. Among other things, these powers may include:

• Adding, changing, or eliminating beneficiaries’ interests
• Replacing a trustee
• Amending the trust or redirecting distributions to comply with new laws or to reflect beneficiaries’ changing circumstances

One advantage of using a trust protector is that you can confer powers on the protector that you wouldn’t be able to hold yourself. That is, without exposing your assets to creditors or triggering gift or estate taxes.

Bear in mind that a trust protector should be distinguished from a trustadvisor,who can advise the trustee but has no power to make binding decisions on trust matters.

Two primary benefits

Trust protectors offer two primary benefits:

1. They provide a check against the trustee’s mismanagement, fraud, or abuse.A trust protector might have the power to remove or replace the trustee or veto certain decisions if the trustee isn’t acting in the beneficiaries’ best interests.

2. They allow you to build flexibility into an otherwise rigid estate planning tool.Many people are reluctant to transfer assets to an irrevocable trust out of fear. They fear that changing tax laws or changing circumstances years or even decades later may affect the trust’s ability to achieve their original goals. Additionally, they may be hesitant to provide the trustee with too much discretionary authority over the trust. A trust protector can step in if circumstances change and modify the trust or take other actions to ensure that the trust continues to accomplish your estate planning objectives.

Protecting your family estate

What powers should you grant your trust protector? The answer depends on the nature of your estate plan, your family’s situation, the capabilities of the trustee, and your specific estate planning objectives. But in most cases, it’s advisable to limit the trust protector’s authority to relatively narrow circumstances. Contact our RRBB accountants and advisorsif you have questions regarding a trust protector’s role in your estate plan.

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