A trust, in particular an incentive trust, can be a very useful tool for someone who wants to provide for his heirs but is not sure that the heirs can use the inheritance constructively. A trust can encourage personal responsibility and accomplishment for the beneficiaries; however, it can also cause resentment on the part of the beneficiary towards the trustee. This usually occurs because the beneficiary is limited in the amount of funds that he can access, and the third-party trustee is making determinations about whether a distribution should be made.
The best way to minimize friction between the trustee and beneficiary is to make the terms of the trust as explicit as possible, but there will always be some level of interpretation on the part of the trustee. Another way to lessen issues between a beneficiary and a trustee when there is a dispute is to use a trust protector.
A trust protector is a usually a person who is close to the beneficiary. Most trust protectors are other members of the family, a close family friend, or other advisor who has an intimate knowledge of the family’s circumstances. Using their knowledge of the family, the trust protector can help the trustee make difficult decisions regarding distributions and if allowed can even overrule the trustee.
Role of the Trust Protector
Ideally, if a trust protector is used the roles, responsibilities, and limits on power will be established in the trust document. For example, the trust creator could specify that the trust protector has the ability to overrule the decisions of the trustee on matters of distributions, or the trust protector could be authorized to intercede if he believes that the trust funds are not being invested properly. The more specific that the trust creator can be in describing the duties of the trust protector, the easier the working relationship between the trustee and trust protector will be.
The trust protector’s main role is to serve as an arbiter between the trustee and beneficiary when a dispute arises about distributions of trust funds. The trust protector can interpret the conditions of the trust based on his knowledge of the family and wishes of the trust creator. Although the trust protector may have a closer relationship with the beneficiary, it does not mean that the protector will side with him on every decision.
Another role of the trust protector is to adjust the expectations of the trust with any changes in tax or estate planning law. A trust protector can work with the trustee to decide how the trust should be updated to maximize the tax benefits and then make distributions in addition to investment choices accordingly.
The one role that a trust protector does not play is as the beneficiary’s advocate. A trust protector is not there to work for the beneficiary or against the trustee. The two roles are supposed to work in concert with one another to ensure that the trust’s conditions are being followed according to the creator’s wishes given the economic and familial circumstances while also giving the beneficiary what he is due.