Trust Protectors: Powers, Capacity, and Selection
| Publication year | 2012 |
| Pages | 63 |
| Citation | Vol. 41 No. 9 Pg. 63 |
2012, September, Pg. 63. Trust Protectors: Powers, Capacity, and Selection
September 2012
Vol. 41, No. 9 [Page63]
Trust and Estate Law articles are sponsored by the CBA Trust and Estate Section. Topics include trust and estate planning and administration, probate litigation, guardianships and conservatorships, and tax planning.
Coordinating Editors
David W. Kirch, of David W. Kirch, P.C., Aurora-(303) 671-7726, dkirch@dwkpc.net; Constance D. Smith, of Fairfield and Woods P.C.-(303) 894-4474, csmith@fwlaw.com
About the Author
Gregory T. Densen is a member of Sherman and Howard L.L.C., Denver, where his practice focuses on wealth transfer and tax planning-gdensen@shermanhoward.com.
This article provides an overview of trust protectors, including their powers, role, and capacity.
Neither Colorado statutes nor Colorado case law specifically address the existence or use of trust protectors. Unlike other areas of trust and estate law, where the lack of Colorado law is unique, the law regarding trust protectors is relatively sparse throughout the country. The absence of law creates broad flexibility and great uncertainty.
This article navigates the flexibility and uncertainty by considering the powers that may be granted to a trust protector; the capacity in which those powers should be exercised (as a fiduciary or as a non-fiduciary); and who should serve in the role of trust protector. The article concludes that (1) the powers of a trust protector should be limited and should not conflict with the powers held by other trust participants; (2) whether the trust agreement provides that the trust protector acts as a fiduciary or a non-fiduciary, courts may be inclined to impose fiduciary duties on the trust protector; and (3) trust protectors should be appointed for discrete periods and discrete tasks.
The article first discusses the role of a trust protector. The origin of trust protectors in offshore trusts is briefly considered. The term "trust protector" is explored, beginning with various definitions of the term, and continuing with explanations of roles played by other trust participants.
The article then considers reasons for using a trust protector in domestic trusts. These reasons may include the exercise of powers a trustee cannot exercise and the increasing use of dynastic trusts. This raises the questions of whether a trust protector is needed, the ideal powers for a trust protector to hold, and the degree to which trust protectors and their powers are discussed with clients.
After planners and their clients determine that a trust protector should be used and the powers to be granted to the trust protector, another difficult decision looms. Clients must designate a person or persons to act as the trust protector and develop a plan for appointing successor trust protectors and the circumstances under which a trust protector may be removed and by whom. If powers are granted to a trust protector, it raises the question of whether these powers are held in a fiduciary or non-fiduciary capacity. The article reviews arguments in favor of holding the powers both as a fiduciary and as a non-fiduciary.
The interaction between a trust protector and the trustee (and potentially other trust participants) must be considered, including what information is shared by the trust participants; the plan for sharing information; and, if one or more trust participant fails to act, at what point the other trust participants have an obligation to act. Finally, whether-and if so, how-a trust protector should be compensated must be considered.
The Role of a Trust Protector
The origin of trust protectors frequently is attributed to offshore trusts. Regardless of whether this is accurate, the use of trust protectors in offshore trusts offers a good starting point for developing an understanding of the role of trust protectors.
Offshore trusts use corporate trustees who cannot be controlled by the settlor (through removal powers or otherwise, because these powers would jeopardize the creditor protection sought in this planning) or by U.S. law. A trust protector, often a friend or business partner of the settlor and sometimes a U.S. person (though, this too may jeopardize the creditor protection sought in this planning), is appointed to provide a mechanism to "control" the trustee-through, for example, removal and appointment powers or powers to override a trustee's decision.
A key aspect of a trust protector is that historically it has performed duties that a trustee would not perform, rather than diluting the power of the trustee. Understanding whether, why, and to what extent the powers of the trust protector and the powers of the trustee overlap is an important part of this discussion.
Definition
There are few statutory or case law definitions of "trust protector." A trust protector has been defined as "a person who the settlor appoints to ensure that the trustee carries out the settlor's wishes"(fn1) and "any disinterested person with the discretionary powers outlined in the governing trust instrument and whose decisions are typically binding on all parties."(fn2)
New Hampshire defines a trust protector as follows:
A trust protector or trust advisor is any person, other than a trustee, who under the terms of the trust, an agreement of the qualified beneficiaries, or a court order has a power or duty with respect to a trust, including, without limitation, one or more of the following powers:
1) the power to modify or amend the trust instrument to achieve favorable tax status or respond to changes in any applicable federal, state, or other tax law affecting the trust, including (without limitation) any rulings, regulations, or other guidance implementing or interpreting such laws;
2) the power to amend or modify the trust instrument to take advantage of changes in the rule against perpetuities, laws governing restraints on alienation, or other state laws restricting the terms of the trust, the distribution of trust property, or the administration of the trust;
3) the power to appoint a successor trust protector or trust advisor;
4) the power to review and approve a trustee's trust reports or accountings;
5) the power to change the governing law or principal place of administration of the trust;
6) the power to remove and replace any trust advisor or trust protector for the reasons stated in the trust instrument;
7) the power to remove a trustee, cotrustee, or successor trustee, for the reasons stated in the trust instrument, and appoint a successor;
8) the power to consent to a trustee's or cotrustee's action or inaction in making distributions to beneficiaries;
9) the power to increase or decrease any interest of the beneficiaries in the trust, to grant a power of appointment to one or more trust beneficiaries, or to terminate or amend any power of appointment granted in the trust; however, a modification, amendment or grant of a power of appointment may not grant a beneficial interest in a charitable trust with only charitable beneficiaries to any non-charitable interest or purpose and may not grant a beneficial interest in any trust to the trust protector or trust advisor, or to the estate or for the benefit of the creditors of such trust protector or such trust advisor;
10) the power to perform a specific duty or function that would normally be required of a trustee or cotrustee;
11) the power to advise the trustee or cotrustee concerning any beneficiary;
12) the power to consent to a trustee's or cotrustee's action or inaction relating to investments of...
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