Over the past 20 years, trusts have become the preferred method of passing assets from one generation to another. And most of these trusts are revocable, meaning that the creators of the trusts can make modifications while they are alive to adapt to changing circumstance.
After death, the trust becomes irrevocable and the grantors are no longer around to make changes as circumstances change. The same is true for people who use irrevocable trusts for estate tax planning purposes. Lots of flexibility can be built in, but generally, changes cannot be made without everyone agreeing or without court approval. And maybe not then.
So how do planners deal with this lack of ability to adjust to changing circumstances?
One way is to use a trust protector. Someone who can watch out over the trust, the trustees and the beneficiaries and make changes to adapt to changing situations.
An example might be a trust where a beneficiary has an income right. The Trustee is instructed to pay the income out to the beneficiary.
As long as the beneficiary is responsible and living a “normal” life, this type of a provision can make sense.
But if the beneficiary is suffering from a disability or addiction or has become a spendthrift, it may make sense to turn off the income right.
One of our colleagues had exactly this situation. A client of his created an irrevocable life insurance trust which allowed the beneficiaries to withdraw funds gifted to the trust on an annual basis. Funds that were not withdrawn were kept in trust and used to purchase a life insurance policy that was designed to pay estate taxes.
Linda, one of the client’s daughters, began to suffer from depression and then began to abuse drugs. Up until that point, none of the beneficiaries had withdrawn funds, preferring the money build up in trust through the life insurance vehicle.
Linda, aware that she had this right demanded that the trustee distribute her share of the gift to her. Under the trust document, the trustee had no ability to do anything but make the distribution. Everyone in the family was concerned that the money would be used to fund Linda’s drug abuse.
Luckily, the trust had a trust protector who was able to amend the distribution plan for the well-being of the beneficiary. The trust protector took the step of limiting distributions to Linda.
Several years later, after significant treatment, Linda had changed her life around. Her parents were thrilled and after an additional trial period, the trust protector took the trust back to its original state.
This is just one real life example of how a trust protector can provide flexibility in situations where the trust is or becomes irrevocable.
The trust protector can also act as a check on a trustee. While most trustees act properly, there have been cases where trustees have put their own interests above those of the beneficiaries. In this case, a Trust Protector can act as a watchdog over the trust, and often will have the power to remove a trustee perceived of acting improperly.
Trust protectors are also often given the power to change the situs or jurisdiction of the trust, resolve disputes between trustees, provide “family knowledge” to corporate trustees as well as changing provisions of the trust to take advantage of changing state laws or tax laws.
So, should your trust have a protector?