As families work through their estate plans with counsel, they often find there is much more to consider than the distribution of assets.
For many families, estate planning is also about preserving family values, protecting a legacy, and ensuring future generations are cared for in a way that reflects their wishes. Some have family-owned businesses they hope will continue operating for generations, while others hold real estate or other assets with special meaning or sentimental value.
While trusts can help families account for some of these personal considerations, certain situations may benefit from additional guidance and flexibility. One way to address many of these facets of planning is to consider the role of a trust protector in estate planning and trust administration.
What is a Trust Protector?
A trust protector is an individual or group of individuals appointed to provide additional guidance, flexibility, or oversight in the administration of a trust. While a trustee is a fiduciary responsible for administering the trust according to its terms, a trust protector may be given certain powers to help ensure the trust continues to serve its intended purpose as circumstances evolve over time.
The role and authority of a trust protector can vary depending on the terms of the trust and applicable state law. For example, Tennessee law (T.C.A. § 35-15-1201(a)) specifically recognizes trust protectors, also referred to as trust advisors, as any person or committee of persons, other than a trustee, who holds a power or duty with respect to a trust under the terms of the trust, a nonjudicial settlement agreement, or a court order, including but not limited to the powers enumerated in the statute.
Trust Protector Powers and Responsibilities
The powers and responsibilities of a trust protector vary but generally involve exercising powers in line with the grantor’s intent and the beneficiaries’ interests. These can include advising a trustee concerning beneficiaries, consenting to certain distribution or investment decisions, and directing the acquisition, retention, or sale of particular trust assets.
By providing additional insight or oversight, a trust protector can complement the trustee’s expertise and help address the unique needs and priorities of the family.
Who Should Serve as a Trust Protector?
A trust protector may be an individual or a committee of individuals chosen by the grantor (in the instance of appointment under the terms of the trust) or the qualified beneficiaries (in the instance of appointment under a nonjudicial settlement agreement).
Often, families choose a trusted friend or longtime advisor who understands their values, relationships, and long-term goals. This personal knowledge can be especially valuable when navigating sensitive beneficiary matters or decisions involving a family business or other meaningful assets, complementing the trustee’s professional expertise.
When Might a Trust Protector Be Beneficial?
While the role and responsibilities of a trust protector will vary depending on the trust, three circumstances in which this additional perspective may be particularly valuable are:
- when a beneficiary is vulnerable, such as those experiencing a substance-use disorder, gambling disorder, or another condition that requires sensitive distribution decisions;
- when the trust holds a closely held business, real estate, family limited partnership interest, or other illiquid asset requiring specialized judgment; and
- when a grantor’s wishes include involving a trusted individual to provide personal guidance and oversight.
Navigating Sensitive Distribution Decisions
Consider a grantor who sets up a family trust for the benefit of her three children. One beneficiary has a history of alcohol-use disorder that has adversely affected both the beneficiary’s health and financial stability.
The grantor is concerned that, rather than providing for the beneficiary’s support, unrestricted trust distributions could enable the beneficiary’s addiction or place substantial funds in the beneficiary’s hands at a time when the beneficiary may be financially vulnerable.
To address these concerns, a trust may include provisions designed to protect a beneficiary who is affected by substance-use or other circumstances that impact financial decision-making. Depending on the trust’s terms, these provisions might allow for assessment of a beneficiary’s condition, support for treatment, limitations on cash distributions, or temporary restrictions on certain discretionary distributions.
In this situation, appointing a trusted individual who knows the beneficiary and the family well to serve as a trust protector may provide an additional layer of informed decision-making while allowing the trustee to continue providing administrative expertise.
Rather than placing these sensitive discretionary decisions solely in the hands of the trustee, the trust agreement can grant the trust protector specifically defined powers concerning distributions to the beneficiary.
The benefit is not simply the addition of another decision-maker, but the allocation of sensitive decisions to the person whom the grantor believes is best positioned to make them.
Managing Unique or Illiquid Trust Assets
For many families, certain assets represent much more than their monetary value.
Consider a grantor who establishes a trust that holds a significant interest in a closely held family business.
Beyond its financial value, the business may represent years of hard work, family history, and a legacy the family hopes to preserve. The grantor may wish for the asset to remain in the family or be managed according to certain long-term objectives, while avoiding a generalized investment approach that does not fully consider the unique characteristics of the business or the family’s goals.
Holding this type of asset in trust can present unique considerations for a trustee. Illiquid or closely held assets may require specialized knowledge and judgment regarding their operation, management, retention, or eventual sale. While a trustee may have significant expertise in trust administration, family members or close friends may possess a deeper understanding of the business, its history, and the grantor’s long-term objectives.
In these circumstances, the trust agreement may grant a trust protector specifically defined authority concerning the asset. For example, the grantor might appoint an individual with particular knowledge of the family business and authorize that individual to direct whether the asset should be retained or sold, while leaving the trustee responsible for carrying out its other administrative duties.
This arrangement allows the grantor to pair the trustee’s administrative expertise with the specialized knowledge of someone familiar with the asset, helping ensure that decisions reflect an understanding of both its financial characteristics and the grantor’s long-term objectives.
Preserving Grantor Intent and Providing Oversight
One of the challenges of long-term estate planning is anticipating how circumstances may change over time.
Consider a grantor who establishes a trust intended to benefit multiple generations of their family. The grantor has strong feelings about how the trust should be administered, including the importance of preserving family values, supporting particular charitable causes, and addressing the individual needs of beneficiaries. Although these wishes may be reflected in the trust document, the grantor recognizes the inability to anticipate every future circumstance.
The grantor has a longtime friend who understands their values, priorities, and intentions, but who does not wish to assume the full responsibilities associated with serving as trustee.
In this situation, appointing the trusted friend as trust protector may serve as a valuable resource when questions arise regarding the grantor’s intent.
For instance, the trust protector may understand why a particular charitable organization was especially meaningful to the grantor or why certain family considerations influenced the estate plan.
This personal knowledge can provide valuable context for the trustee when administering the trust, particularly as circumstances change over time. The arrangement also allows the grantor to involve someone familiar with their wishes without requiring that individual to undertake the day-to-day responsibilities of serving as trustee.
Depending on the powers granted under the trust document, the trust protector may also serve as an independent source of oversight and accountability. For example, the grantor may authorize the trust protector to remove and appoint trustees, appoint designated representatives to represent beneficiaries, or amend certain trust provisions to address changing circumstances.
These powers can provide meaningful flexibility, particularly for trusts intended to continue for multiple generations. However, the scope of the trust protector’s authority should be carefully considered, especially where the power to amend trust provisions could create unintended tax consequences.
By granting specifically defined powers to a trust protector, the grantor can provide an additional measure of oversight while helping ensure that the trust continues to be administered in a manner consistent with their intentions.
An Additional Layer of Guidance for the Future
A trust protector can be a valuable component of a thoughtfully designed estate plan, particularly when a family faces circumstances requiring specialized knowledge, personal judgment, or additional oversight.
Whether navigating sensitive beneficiary matters, managing unique trust assets, or preserving the grantor’s intentions over time, a trust protector can complement the trustee’s expertise while providing added flexibility and guidance.
While the decision to appoint a trust protector and the scope of the authority granted should be carefully considered with estate planning counsel, this role can offer another layer of protection for the grantor’s wishes as the trust and beneficiaries evolve.
Disclaimer: This is not intended to constitute legal advice. Please seek legal counsel to determine the best estate planning for you based on your specific needs and circumstances.
