September 22, 2017
A trust protector is a person or company with the power to perform duties over a trust and watch over the trust for the long term. The trust protector can help make sure that a trust functions as intended, well into the future, even if your trustees fail to act or if there are changes in the law.
The new Wisconsin Trust Code authorizes the use of a trust protector in Section 701.0818 of the Wisconsin Statutes. This statute explicitly allows the appointment of a trust protector in a trust document by the trust creator, giving the trust protector authority over the trust when the person creating the trust is unable to modify or change it.
When Can a Trust Protector Protect a Trust?
To make the concept easier to understand, our estate planning attorneys have set forth two basic examples where having a trust protector named in your trust as part of your estate plan could be advantageous:
Example 1: All of the trustees named in an irrevocable trust, which cannot be easily changed, pass away. There is no named successor trustee who is willing to act. Normally if a trust has no willing and able trustee named, a court will be required to name a successor trustee. This requires a court hearing and leaves the appointment of a trustee up to a judge. If a trust has named a trust protector, that trust protector will be able to name a new trustee without having to involve the expense and hassle of going to court.
Example 2: All of the trustees named in a revocable trust, after the creator has passed away, are no longer willing to act or have also passed away. As with Example 1, having a trust protector named will allow a new trustee to be easily appointed without involving expensive court action.
Updating a Trust as Laws Change
Example 3: Long after an irrevocable trust or special needs trust was established, laws effecting the trust administration can change. Normally a trust has no ability to update to comply with the new laws without court involvement. However, an appointed trust protector can indeed update the trust powers to comply with the new tax laws.
Example 4: With a revocable trust, long after the creator has died tax or trust laws change, it may be advantageous to update the trust. Maybe the trust is holding funds for a young child or grandchild to cover support or educational expenses. If the trust named a trust protector with the appropriate powers to update trust provisions, even though the trust creator is deceased, the trust can be updated to comply with new laws.
Additional Updating Considerations
Example 5: A trust that may receive an IRA or other retirement account distribution, with potential tax implications, should name a trust protector so the trust can be updated to comply with future IRA or other retirement tax distribution rules. In this scenario, the potential tax savings could be substantial if due to tax law changes, the trust no longer complies with the requirements to stretch out a traditional IRA payable to a trust.
Example 6: The ability to appoint an independent third party, who is not an “adverse” party under IRA regulations, to approve income distributions to the person who set up an irrevocable trust. In this circumstance, a third-party would need to be appointed to act as the trust protector of your trust due to special IRS rules requiring a non-adverse party to have income distribution powers if the irrevocable trust is to be treated as a “grantor” trust.
Example 7: The trust protector could be given the duty to review a trustee’s accounting for a disabled or minor beneficiary or to approve an accounting of a special needs trust.
Other common uses are to review accountings for a beneficiary, void or oversee investment decisions, resolve disputes between beneficiaries, and the power to remove problem trustees.
Can a Trustee Also be a Trust Protector?
Often it is appropriate that a trustee be given certain trust protector powers. For example, a trustee could be given the power to appoint a successor trustee, as trust protector, or to change the principal place of business or tax location of a trust. Often, the trustees named by the trust creator are the most trusted persons available. Often, giving the trustee power as a trust protector to update administrative provisions or appoint a successor trustee is best accomplished by the then acting trustee.
Sometimes, a non-beneficiary and non-trustee is a more appropriate choice for a trust protector. It often depends upon family dynamics. For example, the power to interpret ambiguities in a trust should normally not be done by a trust protector who is also a beneficiary of the trust. Giving a trustee the power to remove a problem trustee, would accomplish little. So, in certain circumstances, having a third party independent trust protector named in the trust document, may be appropriate.
Addressing Your Estate Planning Needs
At Wokwicz Law Offices, we routinely name trust protectors in our clients’ trusts to help keep their trusts running smoothly over time. Let our experience guide you when creating your estate plan with a trust with the appropriate trust protector provisions.