Mar 2025 Newsletter – Roles and Benefits of a Trust Protector

The Role and Benefits of a Trust Protector

What is a Trust Protector?

A growing trend in trust planning is the use of a Trust Protector. A Trust Protector is a person the settlor or creator of the Trust appoints to ensure that the trustee carries out the settlor’s wishes. In other words, a Trust Protector is the watchdog of the trust and trustee.

Background

Historically, settlors appointed Trust Protectors to oversee the foreign trustees who administered their offshore asset protection trusts. Settlors would setup offshore asset protections trusts to shield their assets from the reach of the U.S. government and domestic creditors. However, in order to take advantage of the creditor protection, settlers had to appoint a foreign trustee – a person or company outside the jurisdiction of the U.S. Often a settlor would have concerns about the foreign trustee’s administration or the settlor did not like ceding complete control to the foreign trustee. Thus, the settlor would appoint a U.S. Trust Protector to oversee the foreign trustee and protect the settlor’s interests during the trust administration.

Over time, the use of Trust Protectors evolved domestically. Domestically, trusts are lasting longer and longer as states have enacted laws governing the length of time a trust could last. More importantly, as Trusts have grown longer in duration, the trust assets grow. More and more, settlors began appointing Trust Protectors to add flexibility to long-term trusts and to increase the settlor’s ability to control the trustee’s behavior over the long haul, especially after the settlor has died.

The Role of the Trust Protector

A Trust Protector is not to be confused with a trustee. A trustee works for the benefit of the beneficiaries. The Trust Protector is there to serve the settlor’s interests. In other words, the Trust Protector oversees administration of the trust. Unfortunately, vesting too much power and discretion in a trustee can increase the risk that the trustee will veer away from the settlor’s original intentions in creating the trust. The Trust Protector can act as a power check on the trustee.

Furthermore, historically, beneficiaries were responsible for monitoring the actions of trustees. However, as trusts have grown longer in duration and handle greater amounts of assets and distributions, it is not realistic to expect beneficiaries to be able to watch every move of the trustee. The Trust Protector fulfills this role.

Usually, the Trust Protector is a trusted family member or friend, or business associate. For example, the Trust Protector could be the family accountant, lawyer, or other financial advisor. There are also companies that provide trust protector services. By appointing a Trust Protector familiar with the settlor’s desires, the settlor can make sure the administration of the trust is aligned with how he intended it.

Powers of Trust Protector

A settlor can grant almost any power to the Trust Protector. Under the Directed Trust Act, Trust Protectors may be granted the following specific powers:

To increase, decrease or otherwise modify what is distributable to one or more beneficiaries of the trust.
To terminate the trust and direct how the trustee shall distribute the trust property to or in further trust for any one or more of the beneficiaries.
To expand, modify, limit or terminate a power of appointment, and to grant a power of appointment to a beneficiary of the trust on terms as the trust protector specifies.
The powers to adjust between income and principal and to convert the trust to a unitrust in accordance with section 8105 of PA Con Stat (relating to power to convert to unitrust).
To convert a trust in whole or in part to a special needs trust, or provide that a special needs trust shall arise or be established at a specific time or upon the occurrence of an event with respect to some or all of the trust’s assets.
To appoint or remove trustees, investment advisors and investment managers, and prescribe a plan of succession for future holders of any of these offices.
To appoint or remove trustees, investment advisors, investment managers and trust directors, specify their powers and modify the powers of a trust director.
To appoint one or more successor trust protectors, and prescribe a plan of succession for future holders of that office.
To renounce, release, limit or modify any power given to a trustee by the terms of the trust or by law.
To resolve disagreements among or between trustees.
To change the trust’s situs or governing law, or both.
To apply to a court of competent jurisdiction to interpret any terms of the trust or pass upon an action that the trust protector, another trust director or a trustee proposes to take or not take.
Any other or different power that the settlor expressly grants to the trust protector.

A settlor can expressly authorize a trust protector to take other actions under the terms of the trust, so long as the trust protector does not act in a manner that personally benefits the trust protector or gives the trust protector a taxable power of appointment.

A settlor could authorize a trust protector to take actions without notifying beneficiaries first. However, in general, it is recommended to require notice to beneficiaries as a failsafe to prevent trust protector’s actions from going unchecked.

Recommended Examples of situations where using a Trust Protector would be beneficial include:

Long Term Trust. If the settlor intends to setup a trust that will last several generations, he should consider the appointment of a Trust Protector. For example, dynasty trusts or generation-skipping transfer trusts have become more popular. With these types of trusts, circumstances are likely to change. The changes per the Pennsylvania Directed Trust Act may be external, such as changes in the economy that affect the trust’s performance or changes in tax laws, or the changes may be among beneficiaries to the trust, such as when: a) a beneficiary incurs an unexpected disability; b) a corporate trustee changes ownership; c) a beneficiary is undergoing a divorce; d) a beneficiary is unable to manage his estate due to illness, incompetence, addiction(s), undue influence, poor motivation or other similar circumstances, temporarily, or permanently; e) terms of the trust need to be modify due to issues arising among the beneficiaries; or, f) a beneficiary may need an extraordinary, unexpected one time distribution for education, marriage, divorce, buying a home or otherwise. A Trust Protector can account for and make the changes necessary when changes occur by making or withholding distributions.
Multiple Trustees. If the settlor intends to appoint multiple trustees, he should appoint a Trust Protector. The Trust Protector can be the final arbiter in disputes between or among the trustees. The Trust Protector can also easily replace a difficult or underperforming trustee, if necessary.
Trustee without Sufficient Knowledge. A settlor may appoint an individual trustee without sufficient knowledge as to asset management and investing. In this case, the settlor could appoint a financially savvy Trust Protector to oversee the individual trustee. In another situation, the settlor may appoint a corporate trustee without knowledge as to the family dynamics or settlor’s intentions. In this case, the settlor may appoint a Trust Protector who has specific knowledge of the family and family circumstances. The Trust Protector can provide the additional guidance necessary where the trustee lacks information.
Many Beneficiaries. Similar to the long term trust situation, if the trust will have many beneficiaries, spread out over multiple generations, a Trust Protector is useful. The Trust Protector will oversee distributions by the trustee making sure that the distribution scheme is aligned with the settlor’s original intentions. Thus, if the settlor intended beneficiaries to receive distributions according to their needs, the Trust Protector can ensure that the trustee is favoring those beneficiaries who require it.
Preventing Litigation. Perhaps the greatest use of a Trust Protector lies in its ability to prevent litigation. If there is a dispute, whether between trustees, or between trustees and beneficiaries, the Trust Protector can be the mediator and have the final say. By using a Trust Protector to resolve disputes, the trust can avoid litigation which can be costly and time consuming.

Ultimately, a Trust Protector provides additional oversight and flexibility. While a trustee’s loyalty – whether to the trust or the beneficiaries – may not be clear, the Trust Protector’s loyalty is always to the settlor and the settlor’s intentions. A Trust Protector can help to administer the trust by monitoring the trustee’s actions and making decisions in the operation of the trust and distribution of assets. Any individual desiring to establish a long term trust that potentially could have many beneficiaries or may require multiple trustees should seriously consider appointing a Trust Protector, a Trust Director and a Trust Director for Investments.

If you are interested in updating your Trust to include a Trust Protector, feel free to contact Joseph R. Pozzuolo, Esquire, or Jeffrey S. Pozzuolo, Esquire at our offices to obtain legal guidance to achieve, protect and ensure your original goals and original intentions are carried out.