A trust protector is a person who is not a trustee, but yet holds powers over an individual’s trust. Some may ask, “Why would anyone who is fortunate enough to have a trust, and confident enough to designate any third-party to be a trustee, appoint another person to look over the shoulder of the trustee, and possibly exercise control of the trust assets?”

It started in the early 1980’s when an increasing number of U.S. citizens began to establish off-shore trusts. After having relinquished control in order to protect their assets, grantors sought a mechanism that would allow them to “control” unforeseen events. Shortly thereafter, attorneys realized the benefits of trust protectors and began to apply those benefits to other types of domestic trusts, more specifically, those intended to last for a long period of time, so-called “dynasty trusts”. The thinking is, with a trust that could last forever (in a state like Pennsylvania that has abolished the old English law known as the rule against perpetuities), there should be a procedure to take into account changes in family circumstances, as well as changes in tax and non-tax laws, which are almost certain to occur during the “forever” term.

But is there statutory authority that permits a grantor (settlor) of a trust to appoint such a person with far reaching powers? In fact, there is. More than half of the states in the U.S. have enacted statutes regarding trust protectors or direction advisors. Pennsylvania’s law can be found in §7778(b) of the PEF Code. This section provides that if a trust instrument gives someone the “power to direct certain actions of the trustee, the trustee shall act in accordance with a written exercise of the power 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 fiduciary duty that the person holding the power owes to the beneficiaries of the trust.”

The list of powers that can be given to a trust protector is wide reaching, and includes: removing and/or replacing a trustee (the most commonly used power), controlling investment and/or distribution decisions; vetoing the action of a trustee; and many others.

Who one chooses to serve as the trust protector will depend on the particular powers granted in the trust agreement. But it is extremely important to describe in great detail the purposes and the powers given to the protector in order to provide guidance to the manner in which those powers should be exercised.

Not every trust needs a trust protector. But for those who wish to consider doing so, keep in mind that it does come with risks that cannot be ignored. These include the following:

• Case law is practically non-existent
• Be cautious in giving large numbers of powers
• Administering a broad number of powers can be complex, and ultimately lead to a trust protector Being treated as a trustee
• some powers can lead to unintended legal and tax consequences

The lesson here is clear: seek seasoned professional advice before adding a protector to your trust.

For questions, comments or additional information, please contact Joel Luber, Chair of our Estates & Trusts Group, at jluber@regerlaw.com or via phone at 215.495.6519.