Who and What is a Trust Protector?

The first trusts were created during the crusades. Knights travelling to the Holy Land wanted a mechanism to protect their lands and assets by ensuring the knight's property would still be there when the knight returned from crusading. Needless to say, in the last 700-800 years, trusts have become more complex. There are countless types of trusts: revocable and irrevocable trusts, grantor trusts, qualified trusts, lead trusts, life insurance, annuity trusts, unit trusts, charitable trusts, and numerous others.

The basic tenet of a trust is…well, trust.

The goal of any settlor nominating a trustee, or successor trustee, is that the settlor believes the trustees is responsible, trustworthy and understands the fiduciary nature of the trustee's role. But, sometimes the temptation is too great for the trustee, and the trustee abuses their power. While out- right embezzlement by the trustee is a concern, the most common way a trustee acts inappropriately is by milking the trust for fees from the trust. For example, say one of the beneficiaries named in the trust might be a spendthrift or a drug addict. The trustee could manufacture a lawsuit by cutting off that beneficiary's trust disbursements. The trustee will incur "legitimate" trustee fees for defending the trust when that supposedly spendthrift beneficiary has to sue to fight being cut-off.

There is a way to put a stop such sham lawsuits by naming a trust protector. Trust protectors, long popular in offshore-asset protection trusts, are becoming more popular in domestic trusts. The idea behind the trust protector is to have an impartial person that can watch over the trustee, and terminate the trustee for any misconduct.

Originally, the only duty of the trust protector was to fire the trustee, but, like trusts themselves, the duties of a trust protector have become more complex. A trust protector's powers could include:

  • Removing and appointing a successor trustee,
  • Allowing the trust to be amended due to changes in the law or to change the situs (aka state residence) of the trust,
  • Resolving disputes between trustees (if there is more than one) or between beneficiaries and the trustee(s),
  • Changing distributions from the trust based on changes in the beneficiaries' lives,
  • Allowing new beneficiaries to be added if there are additional descendents, or
  • Vetoing investment decisions.

The question that typically arises is: who can fill the role of the trust protector? Like a trustee, it is someone that the settlor should trust. Typically, it is a good idea to appoint an independent third party to serve as the trust protector rather than a family member or a beneficiary. A lawyer or accountant may be a good choice because of their impartiality. There are also companies that provide trust protector services.

A trust protector can be appointed in any type of trust, but the role of a trust protector is most frequently used in irrevocable trusts. If an irrevocable trust is created that additionally serves asset protection purposes, the trust protector should also usually not be "related or subordinate" to the person who created the trust or of any of the beneficiaries. Further, there may be tax reasons for appointing an independent third party as well.

When delegating powers to trust protector, following the KISSi method is preferred. Giving the trust protector too many powers places the trust protector at serious risk of being deemed a de facto "co-trustee," with all the fiduciary duty baggage that carries.

A trust has numerous moving parts. If there is concern that a trustee might misbehave, having a trust protector in place to step-in and correct that behavior can save the trust time, money and headaches for everyone involved.

Basics of Estate Planning: Estate Planning Documents Every Person Should Have

I am frequently asked what estate planning documents should a "regular" person have. I put "regular" in quotes because there is no such thing as a "regular" person since every person has different estate planning needs. To answer the question, like most answers attorneys provide is "it depends." There a number of factors, like whether a person needs a will or a trust, that could push a person to need more documents than another person. The foundation for any person's estate plan is a three-legged stool that a person utilizes to construct the rest of their estate plan. The three-legged estate planning stool is comprised of at least the first three documents listed below. And, depending on their situation, a person could have need for the last two documents, as well.

  1. Last Will and Testament: This is the first leg of the stool and directs how the personal representative will divide up your probate estate to your heirs and beneficiaries upon your passing. An effective Will has a number of moving parts that can be seen here, here, and here, but provides a degree of control in your estate planning that intestacy provisions do not.
  2. Durable Power of Attorney ("DPOA"): This is the second leg of the stool. A DPOA appoints another person to act on your behalf related to your financial affairs if you become incapacitated. That person is called your agent or power of attorney. The power can be fairly limited or very broad. You can read more on DPOA by clicking here.
  3. Advanced Medical Directive("AMD"): This is the last leg of the stool. An AMD authorizes someone, usually called your healthcare agent, to make medical decisions for you in the event you are unable to do so yourself. This document can also be called a Healthcare Power of Attorney. You can also dictate instructions to your healthcare agent on what level of care you want. You can read more on AMD by clicking here.
  4. Living Will: This legal document goes hand-in-hand with your AMD and can either be a separate document from your AMD or can be incorporated into your AMD. A living will allows you to make known your wishes regarding life-prolonging medical treatments if your healthcare agent is not there to advocate for you at the time of the emergency or appropriate medical personal cannot reach your healthcare agent. If your AMD does not express your desires regarding life-prolonging medical treatments, a living will is usually separately drafted.
  5. Revocable Living Trust: This would be like adding a back to your estate planning stool to make the stool a chair. There is a sliding scale as to the need for a Living Trust but you can read more about that here. A living trust is a legal document that establishes a quasi-separate entity from yourself to hold the legal title of your assets while you hold the beneficial title to the assets. By transferring assets into a living trust, you can provide for continued management of your financial affairs during your lifetime, if you are incapacitated, at your death and even for generations to come. Assets owned by the trust avoid probate and reduces the chance that personal information will become part of the public record.
The last bit of advice I caution people is to make sure that you validly execute all of your estate planning documents and take steps to fund any trusts. If your estate planning documents are not signed pursuant to your state's requirements, the documents are essentially worthless, as you can see from this month's estate of the month. And, many times, people create a trust but never fund the trust by transferring ownership of assets over to the trust. This negates the entire purpose of creating a trust.

Estate of the Month: "Do-It-Yourself" Strikes Again

If you cross paths with many attorneys, at some point, the topic of Do-It-Yourself/On-Line legal ("DIY") services will occur, particularly in the realm of drafting a will. I know many estate planning attorneys that are vehemently against DIY will drafting. I am not particularly against people using DIY legal services. In fact, people that create a will using a DIY program generate a great deal of revenue for me, as I try to clean-up the mess the person, now deceased, made. And, a recent D.C. matter I worked on is a clear demonstration of how DIYing an estate plan can invalidate a person's estate planning.

In this matter, the decedent had three children. In the decedent's will, the decedent nominated the oldest child to be the personal representative. The decedent's will had the basic clauses like family information, introductory, revocation, etc. After the basic clauses, however, the problems appear.

First, the decedent's dispositive section was atypical. A dispositive section is the part of the will that distributes a decedent's probate assets, like tangible personal property, real property owned solely by the decedent, etc., to the decedent's heirs. In this case, the decedent stated that all of the decedent's probate assets would be given to the personal representative/child (hereinafter "PRC") to be distributed to the other children as the PRC saw fit.

I do not think you could draft a dispositive clause more likely to instigate litigation than that one. Under the terms of the decedent's will everything is bequeathed to the PRC. If the PRC simply decided that the other children did not deserve to inherit any of the estate, the PRC could just keep everything. If the PRC decided to be generous and determined that the PRC's siblingsii were entitled to probate assets, those assets would have to be gifted to the PRC's siblings by the PRC, and thus subject to gift tax rules.

However, the decedent's actual execution of the decedent's last will and testament rendered the dispositive clauses meaningless. In this case, the PRC was a witness to the signing of the will and, thus, is deemed an "interested" person. Under >D.C. Code §18-104(a), any type of "devise, legacy, estate, interest, gift, or power of appointment" affecting property made to an attesting witness (aka the PRC) is void to that person. In plain English, because the PRC was one of the witnesses to the signing of the decedent's will, the PRC would not be able to inherit any probate assets the decedent was giving to the PRC, even though the will is still valid.

Luckily, there is a safe harbor provision in the D.C. Code that protects interested person's that are related to the decedent. D.C. Code §18-104(b) provides that an interested witness to a will is entitled to that portion of the estate that the interested person would take under intestacy. Thus, the intestacy provisions kicked-in in the same way as if there were no will at all for any inheritance the PRC would receive. In this matter, the PRC was a child of the decedent and would inherit one-third of the probate estate. The other two children would each receive one-third, as well. But, if the PRC was in a relationship farther away in the intestacy priority order, such as a grandchild, the PRC would not have received any inheritance. The PRC has gone from potentially inheriting the entire estate to only one-third.

A DIY program can certainly create a valid will but a DIY-written will is only as good if the executing and witnessing of the will follows the law. In this case, the PRC learned that the hard way. Consulting an attorney in this case would have saved money in the long-run.


i KISS is the acronym for "Keep It Simple, Stupid!"

ii The PRC could not disclaim probate assets since the PRC had children and, pursuant to the disclaimer rules, the PRC's children would be the next in line to inherit any assets the PRC disclaimed.

 
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