A trust protector, sometimes also called trust advisor, is a person with no vested interest, often an attorney or accountant named within the trust, who has power over some of the terms of a trust but who is NOT the trustee.
A trust protector, is granted powers under the trust instrument to oversee the trustee’s administration of the trust and/or modify specific provisions of an irrevocable trust to confirm to the grantor’s intent.
Common Powers of a Trust Protector:
- Power to remove and replace the trustee. Prior to the Wall case and the Service’s acquiescence in Revenue Ruling 95-58, there was a concern that if the grantor of an irrevocable trust held a power to remove and replace the trustee, it would cause estate tax inclusion under IRC §§ 2036(a)(1) or 2036(a)(2). After Revenue Ruling 95-58, we now know that the power to remove and replace the trustee may be held even by the grantors so long as the replacement trustee is not “related or subordinate” to the grantors within the meaning of IRC § 672(c). It stands to reason that the same power held by an independent third party is no more violative of IRC §§ 2036(a)(1) or 2036(a)(2).
- Power to veto or direct proposed trust distributions and investments. In the offshore arena, the protector’s power to veto or direct distributions from the trust and investments of trust property was a means of creating checks and balances over the offshore trustee with whom the grantor may have had little experience. The same logic applies domestically when the trustee is a corporate fiduciary or anyone else with whom the grantor has had few dealings.
- Power to amend the trust. The power to amend can be drafted as narrowly or as broadly as the grantor desires. Common amendments include amendments to correct a scrivener’s error, to reflect and take advantage of new laws, to alter the administrative provisions of the trust, to terminate the trust, and potentially to alter the dispositive provisions of the trust. Trust protectors can be given the power to allow an inclusion in the estate of the beneficiary for income tax purposes to achieve an adjustment to fair market value of assets within an estate to reduce or avoid capital gains taxes.
- Power to add beneficiaries. The ability to add beneficiaries is typically a power granted to trigger grantor trust status. In order to cause grantor trust status, the power must provide for the addition of beneficiaries other than after-born or later adopted descendants of the beneficiaries. This power should be granted sparingly because of the obvious potential for abuse.
- Power to re-grant any powers held by the grantors which have been released. Grantor trust status is frequently triggered by the grantor’s retention of the right to remove trust assets and replace them with assets of equivalent value. A convenient way to cause the trust to be a non-grantor trust, i.e., to “toggle off” grantor trust status, is for the grantor to simply release this right. Once released, the grantor has no manner of independently reacquiring that right and therefore the toggle because of a one-time event. A convenient way to subsequently “toggle on” grantor trust status when desired is for the protector to simply exercise the power to re-grant any powers held by the grantors which have been released.
- Power to change trust situs. As the various states’ laws continue to evolve in the area of self-settled trusts, Rule Against Perpetuities, and state income tax, grantors like having the flexibility to relocate the situs of the trust during their lifetime and would like for their beneficiaries to have that power after they have passed.
- Power to distribute property to another trust created by the grantor. If the grantor is not comfortable granting a broad power of amendment over the trust, the grantor might safely grant the protector the power to distribute property to another trust created by the grantor.
- In order to allow a trust protector to act without fear of being sued by a beneficiary, the trust may also provide that the trust protector is to be indemnified for any action taken absent actual fraud or intent to harm a beneficiary, or self-dealing.
Who can be named Trust Protector?
The ideal trust protector is someone who would act exactly as the grantor would act in a given situation. A trust protector is almost always an attorney, and usually the lawyer who drafts the revocable trust. By law, the trust protector must be:
- A third party (not the grantor, trustee, nor a beneficiary)
- A person not subordinate to the grantor
- Someone who is able to perform the functions of the trust protector.
What Triggers the Actions of a Trust Protector?
A trust protector will be triggered to act when an interested party, such as a beneficiary or trustee, steps forward and request they take action.
Trust Protectors while Grantor is Alive?
A trust protector may be crucial not only to modify a revocable trust after the grantor’s passes to ensure his/her wishes are carried out, but also for certain trusts during the grantor’s lifetime.
For example, when an irrevocable trust is used for asset protection, it is foreseeable that circumstances change for the grantor or laws change that would require the irrevocable trust to be modified to achieve the grantor’s goal. In that instance, a trust protector, could be called upon to act.
Trust Protector Fees:
Some clients might be concerned about the extra fees when considering adding trust protector provisions. Fees are not generally incurred until the trust protector has to act and services are rendered. Also, to be considered, the typical cost of going to probate court to make any change to a trust (for example when an afterborn descendant makes a claim) can cost in the thousands and even more if disputed.
 H.S. Wall Est., 101 TC 300, Dec. 49,330 (1994).
 Rev. Rul. 95-58, 1995-2 CB 191
 IRC § 674(c).
 IRC § 675(4)(c).
 These provisions are similar to the “flight clauses” typically found in offshore asset protection trusts.