The Trust Protector: Drafting Tips, 0720 SCBJ, SC Lawyer, July 2020, #30

AuthorBy Michael Pack
PositionVol. 32 Issue 1 Pg. 30

The Trust Protector: Drafting Tips

Vol. 32 Issue 1 Pg. 30

South Carolina BAR Journal

July, 2020

By Michael Pack

Lawyers drafting trusts have many tools and techniques available to accomplish the objectives of the client while also preserving flexibility for future unforeseen circumstances. Absent a “crystal ball,” lawyers cannot draft for the unknown. The use of a trust protector is one such tool available to preserve future flexibility in the administration of a trust, and can benefit the client/settlor, the beneficiaries, the trustee, the courts, and even the drafting lawyer.

The use of trust protectors has become more and more frequent. Historically, trust protectors were commonly used in irrevocable offshore asset protection trusts.[1] With such trusts, the administrative authority sits solely within the discretion of the trustee (and not the settlor). Therefore, a trust protector could be used to exercise authority while still preserving the protective qualities of the trust. Because the authority vested in a trust protector could be substantial, and often-times a trust protector would have little knowledge of the settlor or any beneficiaries, trust protector statutes provide that the role of a trust protector is presumed to be non-fiduciary, and therefore would not be liable to beneficiaries.2 With respect to this fiduciary designation, domestic statutes are inconsistent, with some states presuming trust protectors to be fiduciaries unless stated otherwise, other states presuming trust protects to not be fiduciaries unless stated otherwise, while other states are silent on the issue.3

Very generally, a trust protector is the holder of a power, granted by the terms of the trust, who is not the trustee, and who acts independently of the trustee. A trust advisor is a person who has the power or responsibility to direct or advise a trustee with respect to the exercise of the trustee’s powers, and cannot act independently of the trustee.4 In South Carolina, a “‘[t]rust protector’ is a person, committee of persons or entity who is or who are designated as a trust protector whose appointment is provided for in the trust instrument.”5 South Carolina law provides many important decisions that can be made by a trust protector, including the discretion to: 1.modify or amend the trust instrument to achieve favorable tax status or respond to changes in the Internal Revenue Code, state law, or the rulings and regulations thereunder;

2. increase or decrease the interests of any beneficiaries to the trust;

3. modify the terms of any power of appointment granted by the trust. However, a modification or amendment may not grant a beneficial interest to any individual or class of individuals not specifically provided for under the trust instrument;

4. remove and appoint a trustee, trust advisor, investment committee member, or distribution committee member;

5. terminate the trust;

6. veto or direct trust distributions;

7. change situs or governing law of the trust, or both;

8. appoint a successor trust protector;

9. interpret terms of the trust instrument at the request of the trustee;

10. advise the trustee on matters concerning a beneficiary; and

11. amend or modify the trust instrument to take advantage of laws governing restraints on alienation, distribution of trust property, or the administration of the trust.6

The actions above are substantial in terms of authority. While the ability to name a trust protector and authorize any of the above actions does provide future flexibility, there are concerns in implementation because the settlor cannot anticipate all facts and circumstances that will occur in the future. For example, can the trust protector alter the intended estate plan of the settlor? Also, what if the trust protector has the authority to make a decision although the trust protector has a conflict of interest, such as a sibling beneficiary making a decision which benefits him instead of another sibling beneficiary? Is a trust protector a fiduciary? In planning for the future, lawyers should consider the following when designating and drafting for a trust protector:

1. Who will serve as trust protector?

The trust settlor must determine who shall serve as trust protector. While family members and friends may come to mind first for a client, it is prudent to explain that banks, trust companies, and other third...

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