3 Powers to Consider Giving to a Trust Protector

Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important that they include a trust protector who will have the ability to adjust the trust provisions as circumstances, beneficiaries, and governing laws change.

What is a Trust Protector?

A trust protector is an individual or group of individuals who are given the power to insure that the purposes and goals of the creator of an irrevocable trust are ultimately fulfilled.  Generally the trust protector may be a family member or friend (typically someone who is not a beneficiary or trustee of the trust), an unrelated trusted advisor, or a group of these individuals acting by majority or unanimous agreement.  The choice of who to name as the trust protector will depend on the trust creator’s wishes and the intended duration of the trust.

What Powers Should a Trust Protector Hold?

 A trust protector can be given as few or as many powers as the trust creator desires.  While it may be tempting to give a trust protector a wide array of powers to deal with every possible future circumstance, the trust creator should carefully consider the specific purposes and goals for their trust and only give the trust protector powers that will further those purposes and goals. 

 Regardless of a trust creator’s intent, below are three powers that all trust creators should consider giving their trust protectors:

1.      Power to Amend Trust Provisions.  Some irrevocable trusts that are intended to continue for multiple generations begin as revocable trusts that only become irrevocable after the trust creator dies or at some other time in the future.  If the trust creator fails to update the trust due to changes in circumstances, beneficiaries, or governing laws while the trust is still revocable, a trust protector can fix these issues after the trust becomes irrevocable.

2.      Power to Add, Remove and Replace Trustees.  Giving this power to the trust beneficiaries may defeat the trust creator’s intent since the beneficiaries may be inclined to hastily remove a trustee who does not give in to their each and every request. Instead, a trust protector can take an objective look at the trustee’s actions or inactions and determine if the trust creator’s intent is being fulfilled or derailed. 

3.      Power to Change Trust Situs and Governing Law.  Since it is impossible to predict where the beneficiaries and trustees of an irrevocable trust will live in the future, this power is critical to insure that the trust will continue for as long as the trust creator intended and with minimum tax consequences.  Giving this power to the trust protector will allow an objective party to determine if the change will be beneficial or is necessary.

Final Thoughts on Trust Protectors

Including a trust protector in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust.  Nonetheless, the trust protector should only be given powers that will insure the purposes and goals of the trust creator are ultimately fulfilled.

If you are interested in adding a trust protector to your trust or would like to have the trust protector provisions of your trust reviewed, please call our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

5 Good Reasons to Decant a Trust

Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations.  Since these trusts are designed to span multiple decades, it is important that they include trust decanting provisions to address changes in circumstances, beneficiaries, and governing laws.

What is Trust Decanting?

When a bottle of wine is decanted, it is poured from one container into another.  When a trust is “decanted,” the funds from an existing trust are removed and distributed into a new trust that has different and more favorable terms. 

When Should a Trust Be Decanted?

Provisions for trust decanting should be included in trusts that are intended to last decades into the future. Decanting allows the following to be addressed:

1.      Clarifying ambiguities or drafting errors in the trust agreement.  As trust beneficiaries die and younger generations become the new heirs, vague provisions or outright mistakes in the original trust agreement may become apparent.  Decanting can be used to correct these problems.

2.      Providing for a special needs beneficiary.  A trust that is not tailored to provide for a special needs beneficiary will cause the beneficiary to lose government benefits.  Decanting can be used to turn a support trust into a full supplementary needs trust.

3.      Protecting the trust assets from the beneficiary’s creditors.  A trust that is not designed to protect the trust assets from being snatched by the beneficiary’s creditors can be rapidly depleted if the beneficiary is sued.  Decanting can be used to convert a support trust into a full discretionary trust that the beneficiary’s creditors will not be able to reach.

4.      Merging similar trusts into a single trust or creating separate trusts from a single trust.  An individual may be the beneficiary of multiple trusts that have similar terms.  Decanting can be used to combine these trusts into one trust which will reduce administrative costs and oversight.  On the other hand, a single trust that has multiple beneficiaries who have differing needs can be decanted into separate trusts tailored to each individual beneficiary.

5.      Changing the governing law or situs to a different state.  Changes in state and federal laws can adversely affect the administration and taxation of a multi-generational trust.  Decanting can be used to take a trust that is governed by laws that have become unfavorable and convert it into a trust that is governed by different and more advantageous laws.   

Final Thoughts on Trust Decanting

Including trust decanting provisions in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust.  This will help to insure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense. 

If you are interested in adding trust decanting provisions to your trust or would like to have the decanting provisions of your trust reviewed, please call our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.