Trust Protectors in Depth
Stuart J. Kohn and Robert A. Romanoff
I.INTRODUCTION
As will be detailed in these materials, trust protectors provide an extremely useful estate planning tool
by providing flexibility in an irrevocable trust. The trust protector can be given a broad array of powers
to address an even broader array of circumstances that may arise in the administration of the trust. It is
not these benefits, however, that have caused trust protectors to be the topic of increasing discussion in
legal circles in recent years. Instead, it is the potential liability, or lack thereof, that may come with those
powers. The resulting debate concerning the use of trust protectors focuses primarily on one question
– is the trust protector a fiduciary? More specifically, does the trust protector face potential fiduciary liability?
Rob Romanoff serves as Levenfeld Pearlstein’s Managing Partner, following his succession to the role in January of 2013. Rob
is also a partner in the firm’s Trusts & Estates Group where his nearly 25 years of extensive experience inform his work on estate,
gift and income tax planning and broad-based wealth and business succession planning for high net worth individuals, owners
of closely held businesses and their families. As an extension of that work, Rob also focuses on asset protection planning and the
creation of sophisticated structures to legitimately protect clients’ wealth from the claims of potential future creditors. Additionally,
Rob is actively involved in both contested and routine administration of trusts, guardianship and decedents’ estates. Rob was
elected as a fellow of the American College of Trust and Estate Counsel (ACTEC) in 2002. Stuart J. Kohn is also a partner with Levenfeld Pearlstein and leads the Trusts & Estates Group. He concentrates his practice
in estate, gift and income tax planning and business succession planning, and has significant experience with complex estate
and trust administration matters. Stuart also works with clients to design and implement asset protection strategies. Stuart is
a member of the esteemed estate planning organization, the American College of Trust and Estate Counsel (ACTEC). ACTEC
membership is based on professional reputation, expertise in the fields of trusts and estates and on the basis of having made
substantial contributions to these fields through lecturing, writing, teaching and bar activities.
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In order to be able to truly understand both sides of the debate, and to then make a determination as to
whether to incorporate trust protector provisions in a trust document, the estate planning professional
must understand what a trust protector is and the power that the trust protector is generally given.
Once the planner has a handle on the trust protector concept generally, an analysis of the pertinent
state statutes and case law can then help formulate conclusions regarding the relationship between the
trust protector, the settlor, the trustee and the beneficiaries.
As with most estate planning techniques, tax considerations will also play a role in the utilization of a
trust protector. There are income tax as well as transfer tax implications arising from the powers given
to the trust protector. The identity of the trust protector can dramatically alter the income taxation of
the trust and also may have transfer tax ramifications.
Finally, assuming the estate planner and client have gotten over the above-mentioned hurdles and have
decided to utilize a trust protector in the trust planning, there are a number of drafting considerations
that must be taken in to account when preparing the trust document.
II. DEFINITION AND HISTORY
Typically, the analysis of a legal concept starts with a definition of that concept. In this case, however,
a definition of “trust protector” is actually hard to find—neither Black’s Law Dictionary, nor the Restatement of the Law (Second) Trusts, The Law of Trusts and Trustees (2nd) by Bogert or The Law of
Trusts by Scott and Fratcher, contain a definition or discussion of trust protectors.
The first statutory definition can be found in the Cook Islands International Trust Act, which in 1989
added statutory authority governing trust protectors, and incorporated the following definition of a
trust protector in the applicable statute: “a person who is the holder of a power which, when invoked,
is capable of directing a trustee in matters relating to the trust and in respect of which matters the
trustee has discretion…”1. The first statutory recognition of the trust protector concept in the United
States dates to 1997, when South Dakota enacted §55-1B-1 of its Codified Laws, defining a trust protector quite generically as “any disinterested third party whose appointment is provided for in the trust
instrument.”2
In its most basic sense, a trust protector is a person who is given certain powers in a trust document to
oversee the trust and/or the trustee to ensure the settlor’s intent is carried out. As Alexander Bove, Jr.
details extensively in his writings, the trust protector is really just a variation of a trust advisor. 3 Trust
advisors have been used in trusts since the early 1800’s. The use of a trust advisor historically has entailed nothing more than the bifurcation of the trustee’s powers—for example, a person other than
1
Cook Islands International Trust Amendment Act §3 (1989).
2
S.D. CODIFIED LAWS §55-1B-1 (2004 Supp. 2009).
3
Alexander A. Bove, Jr., The Case Against the Trust Protector, 37 ACTEC J. 77 (Fall 2011).
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the trustee is given the power to direct and control the investments of the trust. Bove, Jr. provides a
detailed review of the early U.S. case law concerning the use of trust advisors and cites Scott on Trusts.
Bove then points out that, “[w]hen one reflects on the perceived role of the protector and considers the
analysis put forth by Scott, it becomes quickly apparent that the term ‘protector’ could be substituted
for the term ‘advisor’ wherever used in Scott’s discussion, without exception.”4
Notwithstanding, most commentators in the United States in recent years attribute the real genesis of
the trust protector to asset protection planning and the use of offshore trusts. In this context, the advisor grew into the role of a “protector”—someone designated to protect the trust by overseeing the actions of the offshore trustee who had little to no connection with the settlor or the trust’s beneficiaries.
The basis for utilizing offshore trusts is creditor protection for the settlor. Even though the settlor is
often a beneficiary of the trust, U.S. courts do not have jurisdiction over the trust because the trustee is
a non-U.S. person or institution. As a result, the trust assets are protected from judgments against the
settlor entered in U.S. courts. However, the U.S. settlor typically has no real connection to the offshore
trustee. Therefore, incorporating a trust protector (selected and known by the settlor) to oversee the
offshore trustee gives the settlor a level of comfort.
The use of asset protection trusts moved from “offshore” planning to “domestic” planning in 1997
when Alaska enacted the first domestic asset protection trust legislation in the United States. A number
of other states have since followed suit with some form of domestic asset protection trust statutes.5 Most
of the statutes authorizing domestic asset protection trusts provide specific provisions for the appointment of trust protectors and delineate their powers.6
The bifurcation of trustee powers and responsibilities has grown dramatically in recent years not only
as a result of increasing asset protection planning, but also with the increasing use of irrevocable trusts,
the evolution of sophisticated estate planning techniques and tax planning strategies, the increasing
complexity of trust assets, and the abolition of the Rule Against Perpetuities in many states. As a result, many states have enacted statutes authorizing a settlor to appoint someone to direct the trustee
in certain circumstances. Article 8 of the Uniform Trust Code (“UTC”) contains a delineation of the
trustee’s power and duties. Section 808(b)–(d), authorizing the settlor’s appointment of someone to
direct the trustee, specifically provides:
(b) If the terms of a trust confer upon a person other than the settlor of a revocable trust power to
direct certain actions of the trustee, the trustee shall act in accordance with an exercise of the power
Alexander A. Bove, Jr., The Trust Protector: Mighty Mouse or Just a Cat in the Bag?, a paper excerpted in part and expanded from
Bove, Jr.’s chapter entitled The Trust Protector: Friend or Fiduciary?, published in Volume II of Asset Protection Strategies—Wealth
Preservation Planning with Domestic and Offshore Entities, edited by Alexander Bove, Jr., published in 2005 by the American
Bar Association.
4
Colorado, Delaware, Hawaii, Missouri, Mississippi, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming.
5
See, e.g., Alaska Stat. 13.36.370(a) (2008); Del. Code Ann. tit. 12, § 3313 (2007 & Supp. 2008); S.D. Codified Laws § 55-1B1(2) (2004 & Supp. 2008).
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unless the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the
attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the
power owes to the beneficiaries of the trust.
(c) The terms of a trust may confer upon a trustee or other person a power to direct the modification
or termination of the trust.
(d) A person, other than a beneficiary, who holds a power to direct is presumptively a fiduciary who,
as such, is required to act in good faith with regard to the purposes of the trust and the interests of the
beneficiaries. The holder of a power to direct is liable for any loss that results from breach of a fiduciary duty.
Twenty-five states7 and the District of Columbia have now enacted the UTC, and all but Utah included some form of Section 808. In addition, a number of states have enacted statutes which, to some
degree, specifically authorize and govern the use of trust protectors.8
III. THE TRUST PROTECTOR’S ROLE
A.Rationale For Use of Trust Protectors
In order to truly understand the benefits and potential pitfalls that result from the use of a trust
protector in an irrevocable trust, it is best to start with an understanding of the rationale for the use
of a trust protector, that is, why incorporate trust protector provisions in such a trust?
Trusts are essential building blocks in most estate plans. From the most basic plan designed only to
pass assets to intended beneficiaries on death to the most complex tax and asset protection strategies, a trust forms the core of the particular estate plan. This reliance on trusts is nothing new; the
roots of American trust laws can be traced back to English law during the time of the Crusades. As
land owners went off to fight, they left their land with someone who would manage the land and
pay the required feudal fees. If a landowner did not return from the war, the caretaker would pass
ownership of the land to the land owner’s next-of-kin.
The rationale for the use of trusts has not changed all that much in the last nine hundred plus years.
A trust is an effective tool to ensure the settlor’s assets pass according to his wishes on his death while
also protecting the assets, not only from creditors or other scrupulous individuals who might take
advantage of the beneficiaries, but also from the beneficiaries themselves.
Alabama, Arizona, Arkansas, Florida, Kansas, Maine, Massachusetts, Michigan, Missouri, Montana, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont,
Virginia and West Virginia, Wyoming.
7
Alaska, Arizona, Colorado, Delaware, Georgia, Idaho, Illinois, Indiana, Kentucky, Missouri, Nevada, New Hampshire,
North Carolina, Ohio, Oklahoma, South Dakota, Tennessee, Utah and Wyoming.
8