Trust Protector – Defender of Trusts

A Trust Protector is a party other than a Trustee or a Beneficiary who has certain powers regarding the Trust and its administration.  These powers may be very broad or narrow as determined by the Trust instrument.  They may include the power to remove or replace trustees and beneficiaries, cure ambiguities, and modify terms and conditions of the Trust.  The Protector may also have powers to enforce mandatory alternative dispute resolution provisions or other conditions placed upon distributions.  These powers will generally be determined by the language of the trust, but may also be limited or supplemented by statute.

Trust Protector’s have been in use for many years.  I started using them back in the early 90’s when I joined a law firm that was using them for a decade before I got there.  Some say they are new.  What they mean is they just learned about them.  A Trust Protector is like the guy with the sword standing behind the person on the throne (the trustee) making sure the person on the throne does what the law requires that person to do.  The Trust Protector should not be the Trustee or have the same powers as the Trustee, but should have oversight over the Trustee and the beneficiaries to make sure the parties comply with the Trust.

Trust Protector Do’s

First, have one.  Second, give them real power.  Third, use a disinterested party (like who creates the Trust).  Fourth, give them cover when they do what you want them to do.  Much of the court action regarding trusts is made necessary because the Trust instrument itself lacks a means of adjusting for changes in circumstances.  This adds expense and complexity to the administration of the Trust.  There are times and circumstances when judicial intervention is both necessary and appropriate.  But there are also a great many circumstances where private solutions get to the same results without the cost, time delay, or public airing of private matters that attend going to court.

For example, in today’s world, it is rare for people to stay in one place for long, or that descendants of the Grantor live in the same state where the Grantor formed the Trust.  The Trust will need to move.  In some instances, it will move by operation of law whether or not the Trust instrument provides for that to happen.  When a Trust has no provision governing how and when its situs will change, the parties are required to go to court.  It makes far more sense to either give that power to a Trustee or, in situations where that may not be appropriate, to give the power to change the situs of the Trust to a Trust protector.  This makes is possible to change the situs of the trust to reflect the practical reality of its parties or properties with an inexpensive private action rather than a costly public proceeding in court.

Trust Protector Don’ts

Don’t think you can get away with ignoring the Protector’s powers.  A recent case in Florida illustrates this point.  In Minassian v. Rachins, 152 So.3d 719, 2014 WL 6775269 (Fla. 4th DCA December 03, 2014), a dispute arose about certain terms of the Trust.  In the midst of the litigation, the Trustee appointed a Trust Protector pursuant to the terms of the Trust.   The Trust Protect had the power to modify the Trust.  In particular, the Trust Protector also had the power to interpret any provision of the Trust that was ambiguous.  The trial court disallowed the Trust Protector’s action.  However, on appeal, the trial court’s action was reversed, and the Trust Protector’s action was upheld.

It is true, the wrong person as Protector can be damaging.  There is a valid need to be protected from inappropriate parties acting as Protector.  Generally, I recommend a licensed professional, with independent professional credentials and obligations, with no economic interest in the Trust or in the administration of its assets.

One important practice to avoid is turning the Trust Protector into a fiduciary.  If a Trust Protector is a fiduciary, that may impair the Protector’s ability to carry out the Grantor’s intent.  The Trust instrument can make the Protector a fiduciary or not.  Taking custody of trust assets can make the Protector a fiduciary.  The trust and statute both can establish that the protector is not a fiduciary.

History of Trust Protectors

Some commentators have characterized the Florida court’s decision as a “privatization” of Trust construction disputes.  Others have used this case to illustrate just how a Trust Protector can work to protect a Trust.

Trust Protectors have a long history, and started with “off shore” trusts.  The came to “on shore” planning in the early 90’s.  When I started using Trust Protector provisions in the early 90’s, it was regarded as radical.  More than one attorney told me they were not permitted.  Now many states including  Florida (here) and Arizona recognize a Trust Protector by statute.  I once had an argument with an attorney who claimed that using a Trust Protector was unethical.  At the time I was acting as Trust Protector to fix a problem in a Trust.  That attorney was representing one of the parties harmed by the problem and benefited by the action I was taking Protector.  he kept saying that what I was doing would not work.  In spite of the attorney’s protestations  while working with me, roughly a year later that same attorney was giving public seminars on the virtues of using a Trust Protector.  Now, even wikipedia has articles about Trust Protectors.  They are discussed in Forbes magazine, and elsewhere.

So What?

Of, so what?  What is the big deal about Trust Protectors?  If your trust is small and simple, and immediately distributes everything after your death, a Protector may be overkill.  For everyone else, a Trust Protector is vital to the long term operation and administration of your Trust.  This is particularly trust of multi-generation Dynasty Trusts or Legacy Trusts.  If your Trust does not have Trust Protector provisions, having it reviewed by an attorney who knows and understands protector provisions would be a good move.  Even if your trust has protector provisions, if it is more than a decade old, it ought to be reviewed and potentially updated.  The law has evolved substantially in this area, and continues to change.  Regular updates are critical to the health and long term success of a Trust.