The Role of the Trust Protector in High-Net-Worth Estate Planning 

High Net-Worth Individuals (“HNWI”) will typically have a sophisticated estate plan given the size of their estate and uniqueness of their assets; this often includes a dynasty trust. The dynasty trust typically nowadays has many roles to fill in addition to trustee, one of the more important roles is the trust protector. Since the dynasty trust carries a significant amount of the HNWI’s wealth and is important to their family’s generational wealth, it is important that the HNWI understands the role of the trust protector. 

Directed Trusts and Their Modern Structure 

Most dynasty trusts are now drafted as directed trusts. A directed trust is a trust that removes one or more powers or discretions traditionally held by the trustee and vests that power or discretion in a person who is either a special trustee or not a trustee at all. The power or discretion can relate to investment decisions, management decisions, distribution decisions, and any other decision affecting the administration of the trust. 

Key Powers of the Trust Protector 

One of the more powerful positions that can be created in the directed trust structure is that of the trust protector. Often the trust protector is vested with key powers that will allow the trust agreement to remain flexible as circumstances change over time. Typical trust protector powers include the following: 

• The ability to amend the trust for certain purposes; 

• The power to change the situs and governing law of the trust; 

• The power to appoint, remove and replace the trustee and other trust advisors; 

• The ability to convert the trust from a grantor trust into a non-grantor trust for income tax purposes; and 

• The power to expand the permissible class of beneficiaries of the trust. 

Customizing the Trust Protector’s Authority 

The scope of the trust protector’s authority will be defined within the trust agreement and can be customized to the HNWI’s specific circumstances. 

Selection Criteria and Legal Considerations 

Generally, the trust protector should be someone who has no beneficial interest in the trust, because adding another discretionary beneficiary to a trust in which the trust protector is beneficially interested could arguably constitute a gift. The trust protector should also be someone over whom the grantor has no power or authority, because a court is likely to treat the grantor as a beneficiary if he or she has the power, whether directly or indirectly, to compel the trust protector to name the grantor as a beneficiary of the trust. The degree of influence or control over the trust protector that will cause the grantor to be deemed to be able to make himself or herself a beneficiary of the trust has not yet been established, but a prudent practitioner should assume that any evidence of a pre-arrangement, even if not legally enforceable, could result in adverse creditor rights over the trust assets. 

Best Practices in Naming the Trust Protector 

The trust agreement may name one or more trust protectors and alternative trust protectors, but the better approach is for an independent trustee to designate the trust protector after the instrument has been executed and funded. Such a process helps minimize the likelihood that the IRS can establish a pre-existing agreement for the trust protector to act in accordance with the grantor’s request, because there was no appointed trust protector when the trust agreement was signed. This reduces the risk that certain Code provisions would apply to pull the assets held in the dynasty trust into the HNWI grantor’s estate and be subject to estate tax due to retained control over the assets through the ability to influence the trust protector. 

Conclusion: The Importance of Proper Selection 

The trust protector is an important role in more sophisticated trust structures and it is important that the trust protector is carefully selected.