Trust Protector

What is a trust protector?

A trust protector is a third party who is appointed by the settlor of a trust to oversee the management of the trust and to ensure that the trustee is acting in the best interests of the beneficiaries.

Roles of trustees and protectors distinguished. 

A trustee’s role involves managing the trust's assets, making distributions to beneficiaries, and ensuring that the trust operates in accordance with its terms. A protector, on the other hand, provides oversight and intervention vis a vis the trustee ensuring the trustee adheres to the trust's terms and acts in the best interest of the beneficiaries. They may possess the power to remove or replace trustees, amend the trust in specific circumstances, or even make decisions on behalf of the trust in some circumstances. 

Another important distinction to point out is that protectors can be given the authority to modify the terms of a trust itself, whereas a trustee cannot. Thus in some instances, even if a trustee has been acting prudently and faultlessly in performing their duties, a protector may still be necessary to perform some essential functions. For example, a protector might: 

• Appoint additional beneficiaries: Under specific circumstances, a protector may have the discretion to add beneficiaries, especially in cases of omitted descendants.
• Terminate the trust: If achieving the trust's purpose becomes impossible or impracticable, a protector might have the authority to end the trust
• Approve or deny distributions: While trustees generally make distribution decisions, a protector can have a say in approving or vetoing unusual or large disbursements.
• Interpret ambiguous trust provisions: When trust terms are unclear, a protector can provide clarity or make determinations, ensuring the trust operates as intended.
• Restructure the trust: If necessary for tax benefits or better asset protection, a protector might have the power to divide the trust or merge it with another.
• Address and settle disputes: In cases of conflicts between beneficiaries or between beneficiaries and the trustee, a protector can mediate, arbitrate, or make binding decisions to resolve the issues.

The importance of appointing a protector for asset protection trusts (APTs)

An APT is a kind of trust used to protect assets from creditors by placing them in the hands of a trustee who is not controlled by the settlor or beneficiaries. Having a protector is especially important in the case of APTs. Because the efficacy of an APT hinges on their being irrevocable, and the settlor’s relinquishment over the management of the trust’s assets and how its funds are used, the disbursements from the trust to the beneficiaries must be at the trustee’s discretion. 

Of course, the scope of such discretion will be outlined in the trust documents or by contract, and in most cases, the trustee will act accordingly. However, if the trustee fails to do so, the protector will be essential to intervene given that the settlor has relinquished the control necessary to do so themself.

Example: Mr. and Mrs. Smith placed a significant portion of their assets in an APT for their children, allowing for distributions like mortgage payments and educational expenses. As their eldest, David, enrolled in medical school and their daughter, Emily, undertook a mortgage, they encountered an issue where the trustee, without any apparent reason, refused to release any of the funds necessary to pay for David’s education or Emily’s mortgage. Being unable to revoke the trust or replace the trustee themselves, Mr. and Mrs. Simth had a protector replace the trustee with someone more reliable.