Tuesday, February 07, 2012

The Superhero of Trusts!

You’ve known for years that you need to “get your affairs in order.”  While you don’t like thinking about it, you know that you are merely mortal and that it would be wise – a gift to your loved ones, in fact – to create an estate plan that allows a trusted person to handle your personal and financial affairs in accordance with your wishes in the event of incapacity or death.  You finally decided to visit your estate planning attorney to address all these lingering issues that you have been mentally and emotionally postponing for far too long.

Your main estate planning document is your revocable living trust.  It clearly dictates who will inherit from you (your “beneficiaries”), how they will inherit, and who will manage your finances in the event of your incapacity and administer the trust upon your death (your “successor trustee”).

 
You are comfortable with your trust as it clearly expresses your intent in a legally binding manner.  You know, however, that circumstances might change: what seems like a good idea today might turn into a disaster tomorrow.  Your beneficiaries might develop special needs or financial / lawsuit problems, the trusted friend or advisor you named as trustee might turn out to be unreliable or deceitful.  You know that as long as you are alive and have capacity, you can change any part of the trust.  But is there any hope after you become incapacitated or pass away?

The solution may be to name a trust protector in addition to a trustee.  A trust protector is a third party who is independent from the trust.  The trust protector has certain powers to protect your overall intent of the trust.  The concept originated in the context of complex offshore irrevocable trusts that were designed for asset protection, but has evolved to be useful in the context of a many common domestic trusts such as life insurance trusts, gifting trusts, and even revocable living trusts.

Some of the powers of a trust protector might include the ability to hire and fire trustees, the ability to change the governing law of a trust, the power to resolve disputes between co-trustees or disputes between trustees and beneficiaries, the ability to veto investment decisions of the trustee, and the ability to modify the trust to keep up with current law or to provide better protection to a beneficiary.  With these powers, just like a superhero, the trust protector can jump in to protect or save the trust when necessary.

 
If a trust is irrevocable at the start, designating a trust protector is a way of maintaining flexibility and control over the trust.  If a trust is revocable at the start – such as a revocable living trust – having trust protector provisions can provide flexibility and control when the trust eventually becomes irrevocable upon your incapacity or death.  

Figuring out whom to designate as your trust protector can be challenging.  While the trust protector does not have the day-to-day responsibilities of your trustee, your trust protector generally has more sophisticated powers and duties.  Generally, naming a trusted advisor such as a CPA or an attorney as your trust protector makes sense.  Alternatively, you may decide not to name a trust protector at the outset, but have provisions that provide a procedure for naming a trust protector in the future if one is needed.