By Bernard A. Krooks, Certified Elder Law Attorney
We have written often about the benefits of using trusts in your estate planning. Trusts can help you avoid probate, provide for orderly and efficient management of your assets, and protect assets from creditors, divorced spouses, and the catastrophic costs of long-term care, to name a few reasons. When setting up a trust, there are basically three parties involved in the trust document: (1) the person who creates the trust (you, otherwise known as the “settlor”), (2), the person or entity responsible for administering the trust (the “trustee”), and (3) the people who benefit from the existence of the trust (the “beneficiaries”). Well, as the Eagles used to say: There’s a New Kid in Town, and he is called the “trust protector.”
Trust protectors, while more common in offshore trusts, are a relatively new concept in trusts created in the United States. Generally speaking, a trust protector is like an enforcer, someone who makes sure others are doing what they are supposed to be doing. The duties of the trust protector may vary, depending on state law and the language of the trust agreement. New York currently does not have a trust protector statute. This does not mean that you cannot use trust protectors in New York, but rather, that the trust instrument will define the powers, duties and responsibilities of the trust protector.
So, what can a trust protector do and why should you consider including one in your trust? Let’s take a look at some scenarios. If circumstances change after the execution of the trust, the trust protector may be able to make changes to the trust even if it is an irrevocable trust. These potential changes often benefit the beneficiaries of the trust in furtherance of your intent as creator of the trust. This power can be especially important if there are changes to the law that may cause some of the trust provisions to be problematic. Alternatively, it might make sense to change the governing law of the trust from one state to another if the latter state’s laws are more accommodating to carrying out the purposes of the trust, including reducing the amount of taxes imposed on the trust. This could happen if one state changes is laws after the signing of the trust. The trust protector may also be able to modify the terms of trust distributions. This could be extremely beneficial if one of the beneficiaries of the trust is going through a divorce or a lawsuit. Another power that may be given to the trust protector is the power to remove or replace the trustee. This can happen for a number of reasons, including the trustee’s inability or failure to act. Without this power, it might be necessary to commence a time-consuming and expensive court proceeding. The power to remove a trustee and replace with a new one can be especially important in special needs trusts where the beneficiary of the trust may not have the ability to monitor the actions of the trustee.
The foregoing trust protector powers are not required, they are simply examples of the broad range of powers you may give a trust protector. And, that is the real message here. You, as the creator of the trust, can decide just how much or how little power the trust protector should have. Or, whether your trust should have a protector at all.
You may name anyone you want as trust protector, including a friend, relative, lawyer, accountant or other professional. You may also give them whatever powers you want. However, it is important to consider all issues when deciding upon the power of the trust protector. For example, what compensation, if any, should the trust protector receive? Generally speaking, if you want someone to do a good job, they typically expect to get paid. If you pay them, how much? A percentage of trust assets, an hourly fee? What responsibilities should the trust protector have? Should the trust protector be obligated to review all actions of the trustee or should he simply be required to act when called upon? If the trust protector fails to act, what remedies are available?
Under the proper circumstances, a trust protector can serve a vital role in your trust and overall estate plan. The key is getting the right person to serve and clearly defining the scope of the powers and responsibilities.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been honored as one of the “Best Lawyers” in America for each of the last seven year, past President of the National Academy of Elder Law Attorneys (NAELA), past President of the New York Chapter of NAELA and also served as chair of the Elder Law Section of the New York State Bar Association. He has been selected as a “New York Super Lawyer” since 2006. Call 914-684-2100 or visit elderlawnewyork.com.