Trust Protector-A Good or A Bad Thing?
Denise of Merlin, Oregon, had posed a question regarding the definition of a Trust Protector. We turned to Senior Counsel Sharon C. Nelson of Foley & Lardner, LLP, here and here to help us with these issues.
...In the right circumstances, the use of a trust protector can be invaluable in giving the grantor the peace of mind that his intent will be carried out even if the laws or circumstances of named beneficiaries change. On the other hand, granting broad powers to a trust protector can cause unintended results and change beneficial interests that the grantor never intended. Before including a trust protector in any trust document, the grantor should have the opportunity to carefully consider the possible consequences of giving someone the powers he or she is contemplating. Most importantly, if a grantor does decide to add a trust protector to a trust document, the drafting attorney should carefully define and specify the powers of the trust protector, the limitations placed on the trust protector and the intent of the grantor in naming the protector.
When you meet with your attorney and other consultants to discuss your estate planning for your pet, do not forget to talk about a Trust Protector.
Who Should Serve as A Trust Protector?
Denise of Merlin, Oregon, had posed a question regarding the definition of Trust Protector. We turned to Senior Counsel Sharon C. Nelson of Foley & Lardner, LLP, to help us with these issues.
...Technically, anyone can serve as a trust protector. However, in order to avoid adverse tax consequences (for both the grantor and the trust protector), it is generally advisable to name an independent third party as the trust protector. Trustees, beneficiaries or members of the donor’s immediate family are not independent parties and thus, should generally not be named as trust
protectors. Lawyers, accountants, unrelated business-minded friends, brothers, sisters, aunts and uncles of the grantor are often a good choice for the trust protector role. Corporate fiduciaries are not necessarily the best choice due to the conservative view of many corporate fiduciaries which may make it difficult for them to exercise the authority they are granted...
....While there is no set list of powers that should be granted to a trust protector, there are some powers that would be helpful in most situations that the grantor should consider. For example, the trust protector could be given the power to amend the trust to comply with new tax laws or to address any changes in the law or circumstances of a trust or its beneficiaries that would significantly change the tax treatment of the trust or its beneficiaries. In addition, the trust protector could be given the power to terminate the trust or to remove, add or replace the trustee. Other powers could include the ability to change the governing law or to expand or limit the powers of the Trustee. Some powers, however, such as the power to grant, expand, reduce or eliminate a power of appointment, the power to change, eliminate or add provisions regarding the disposition of income and principal or the power to change beneficiaries should be looked at more closely before including them because beneficial interests could be completely altered. Care should be taken to clearly define the purposes of the trust and to give the trust protector ample guidance as to what is expected and allowed and what is not...
We will conclude this review tomorrow.
What is A Trust Protector?
I mentioned the possible use of a pet trust to my insurance broker and she asked if I had considered a Trust Protector. What is this and what does it do?
Denise Merlin, Oregon
Senior Counsel Sharon C. Nelson of Foley & Lardner, LLP, wrote a very clear understanding of this issue
"The use of trust protectors in trust documents is becoming more and more popular in today’s estate planning environment. The purpose of a trust protector is to provide flexibility to an irrevocable trust. However, before adding a trust protector to any documents, the grantor should carefully weigh the advantages and disadvantages inherent in the role of trust protector...
The trust protector holds a power to direct the trustee in matters relating to the trust. The role of the trust protector and the ability of the trust protector to direct the trustee will vary from trust to trust depending on specific drafting. The greatest advantage of having a trust protector named in a trust document is that it adds flexibility to the trust and allows the grantor to delegate someone to deal with almost every conceivable future circumstance. This is very attractive in today’s changing estate planning environment where the tax law is in flux. Use of a trust protector can allow amendment of the trust document to achieve positive tax results and allow administration consistent with the grantor’s intent when circumstances change...
The greatest disadvantage to the use of the trust protector is that the grantor is vesting significant power in one person. In addition, because the trust protector is often given the power to amend the trust to take into account the changes in the tax laws, beneficial interests may be altered. Finally, a common complaint of naming a trust protector is that it adds another level of administration and administration expenses..."
Next we will look at her discussion of who should serve as a Trust protector.
Don't Forget to Fund Your Pet Trust
If I have a Pet Trust document created, do I need to do anything else to protect my Afghan Hound, Annika (yes after the recently retired golfer)?
Nathan Gene Stone, Mississippi
Nathan, once you have set up your Pet Trust you need to at least fund it with a minimal amount of money.
For the Trust to take effect, some assets must be transferred into the Trust.
Not everyone understands that the grantor (you as the pet owner) must take some affirmative steps to transfer at least some assets and fund the Trust. Merely executing the Trust itself will not cause the Trust to become funded. You must actually transfer legal title to the Trust.
The transfer is from you as an individual to the Trustee, even if you are also the Trustee.
You need to be clear that any activity that you take is as, “Nathan Gene, Trustee of the Annika the Afghan Hound Trust,” or whatever is the correct designation.
These actions, whether money transfers or whatever needs to be completed on behalf of the Trust and should be by the Trustee and not you as an individual.
You need to discuss all aspects of correctly funding your Pet Trust with your legal counsel to ensure complete accuracy.
The first step is draw up the Trust...then you are on your way to protecting your pet's future.
What is a Trust
A trust is a document you can create to have someone else manage some or all of your property during your lifetime or after your death. This document is called a trust agreement and the person you appoint as the manager of the property is called a trustee. The person who creates the trust is called the settlor, donor, grantor, or trustor (they all mean the same thing). The trustee can invest and manage the trust property for your benefit or for the benefit of another that you appoint in the trust. Whoever receives the benefit of the trust is called a beneficiary. In the trust you can set out the specific powers, responsibilities and duties of the trustee and they are obligated to follow these guidelines.
