No irrevocable trust is failsafe. Although these instruments typically allow for a hassle-free and tax-advantaged transfer of wealth, there is risk associated with the fact that irrevocable trust founders must give up control of the assets they place in their trusts while they are alive, and they certainly cannot control what happens after they die.

Even if you are confident that the trustee you have chosen will carry out your wishes, circumstances may intervene. For example, your original trustee could become physically or mentally incapable of handling the responsibility. Some people reduce such risk by naming a trust protector.

Related Read: Trusts — What is the Hype?

Oversight and second opinions

A trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.

There is virtually no limit to the powers you can confer on a trust protector. For example, you can enable a trust protector to replace a trustee; appoint a successor trustee or successor trust protector; approve or veto investment or beneficiary distribution decisions; and resolve disputes between trustees and beneficiaries.

However, be careful. It may be tempting to provide a protector with a broad range of powers, but this can hamper your original trustee’s ability to manage the trust efficiently. The idea is to protect the integrity of the trust, not to appoint a co-trustee (although that is also an option).

Providing flexibility

Trust protectors can be advantageous when, for instance:

• They are able to remove and replace a trustee who has developed a conflict of interest or failed to manage the trust’s assets in the beneficiaries’ best interests;
• They can modify the trust’s terms to correct trust document errors or clarify ambiguous language; and
• Have the power to change how trust assets are distributed to more effectively achieve your original objectives.

Suppose, for example, that your trust provides that assets will be distributed to your daughter after she graduates from college and lands a paying job. After college, however, your daughter decides to spend two years in the Peace Corps. That decision may not meet the trust’s strict definition of “gainfully employed.” Even so, your daughter did well academically and has demonstrated an ability to manage money responsibly. If the trust has authorized its protector to modify its terms, the protector can allow for distributions to your daughter.

Potential abuse of power

Given the power a protector might have over your family’s wealth, you will want to choose someone whom you trust and who is qualified to make investment and other financial decisions. Many people appoint a professional advisor — such as a CPA, attorney, financial planner or investment manager — who may not be able to serve as trustee but can provide an extra layer of protection by monitoring the trustee.

Appointing a family member as protector is also possible but can be risky. If the protector is a beneficiary of your trust or has the power to direct trust assets to themself, this ability could be treated as a general power of appointment. Such a situation potentially could trigger negative tax consequences.

Making the decision

A trust protector is not essential, and, in most circumstances, well-established irrevocable trusts function according to their original owners’ intentions without a protector’s intervention. However, if you do decide to mitigate any lingering risk by naming a protector, work with experienced legal and estate planning advisors to draw up the paperwork that specifies your protector’s powers.

For more information, contact Jeffrey Green at 312.670.7444 or [email protected]. Visit ORBA.com to learn more about our Wealth Management Services. Sign up here to receive our blogs, newsletters and Client Alerts.