Wealth Planning News

Vol. V, No. 4

Why Is There A Trust Protector?

 

Elsewhere we suggest that if you love someone you may want to disinherit that loved one. Not totally, but just enough to give the loved one control of the inheritance without having to put it into his or her own name.

See our Newsletter: Disinherit A Loved One?

The Normal Goals


Here are the goals of passing an inheritance to loved ones in trust instead of outright:

 

Protect the estate for them, for as many generations as possible from:

 

A. Their disability, inability, inexperience, or lack of initiative if they receive too much too young.

 

B. Their own risk of loss to catastrophic creditor claims, meaning lawsuits in our litigious society.

 

C. Predators in our society, such as divorcing spouses of your descendants, or spouses of your descendants who survive your descendants and remarry someone outside of your family.

 

D. Death taxes on all amounts that you can make tax-free when you die, for as many generations as you can keep the original amounts and any of their growth in value free from death taxes. (Tax protection is often merely a side benefit.)

 

At the same time, many people want to give maximum dignity of control to their descendants by allowing them to serve as their own Trustee of an inherited trust after they reach a suitable age and level of maturity and responsibility.

 

If these goals appeal to you, passing your estate in a protective trust is a wonderful gift of love that you make to your descendants. It gives them more freedom than they would have if the assets went to them outright, because they have control without risk of loss to creditors and predators.

 

Risks of Self Control of an Inherited Trust

 

Asset protection of an inheritance for your loved ones, coupled with giving them control of an inherited trust is weakened if they are subject to litigation where someone seeks to pierce the inherited trust to take its assets or part of its assets by arguing that dominion and control over trust assets is functionally equivalent to ownership for purposes of creditors or divorcing spouses who seek to pierce the trust to obtain assets from the trust.

 

Many advisors who fear such an argument being made use the approach of naming someone other than the trust beneficiary to serve as Trustee full time, and preclude the beneficiary from serving as Trustee. But that approach violates the goal most people have of giving maximum dignity of control to their loved ones who will inherit.

 

A watered down approach is to allow the beneficiary part of the control by letting the beneficiary serve as Trustee for purposes of making trust distributions for the benefit of the Trustee-beneficiary, and requiring that an investment advisor make all investment decisions for the trust. But this watered down version of giving the dignity of control still risks the dominion and control argument being successful for creditors of the beneficiary.

 

Another drawback to having someone other than the beneficiary serve as Trustee and requiring some other Trustee or even an investment advisor, aside from violation of the goal of giving maximum dignity of control to a loved one, are the fees and expenses incident to having a different Trustee even if only for investment decisions.

 

The better solution is to avoid the dominion and control argument by prohibiting a beneficiary from serving as Trustee of the beneficiary's inherited trust only when the beneficiary is under duress, normally defined in the trust document as being involved in litigation or government attempts to obtain funds from the Trust.

 

Asset segregation does not replace liability insurance, it merely provides supplemental protection against loss of other assets in the event an inside claim results in some catastrophic judgment against the owner of an asset. 

In This Issue

Why Is There A Trust Protector?

The Normal Goals

Risks of Self Control

The Trust Protector Solution

The Trust Protector Solution

 

If only we could be sure that all courts in America would accept that solution all would be well. But distrust of our legal system results in the use of a Trust Protector for the beneficiary controlled trust.

 

The most significant power given to a Trust Protector is a veto over trust distributions in order to avoid any payouts from the trust to creditors or divorcing spouses of a beneficiary. So the Trust Protector provisions in most such trusts only come into play when a beneficiary is subject to litigation that could result in orders from a Court or from any government entity to pay out trust assets for a creditor or divorcing spouse of a beneficiary.

 

Such trusts also normally give a Trust Protector power to remove a Trustee and appoint a new Trustee, something normally only done when there is a risk of someone making a dominion and control argument in order to pierce an ongoing trust of a beneficiary. This power to name a Trustee, coupled with a newly appointed Trustee’s power to flee a threatening jurisdiction by moving the trust situs away, and moving all trust assets to a place not subject to orders of any court that might attempt to award trust assets to any creditor of a trust beneficiary, even outside of the U.S. if necessary, provides a strong level of protection for trust assets. Similar provisions exist in most offshore asset protection trusts, and have the advantage of giving a trust beneficiary who if not for the duress of litigation could be trustee of the beneficiary’s trust, a complete defense of impossibility of compliance with any court order for the beneficiary to give trust assets to a creditor or divorcing spouse of the beneficiary. Impossibility of performing a court order is a complete defense to any claim of violation of an order from a court that has ignored the trust provisions for removal of the beneficiary as a Trustee when the beneficiary is under duress of any litigation.

 

Most U.S. attorneys, and most trust beneficiaries, are not familiar with these reasons for having a trust protector, nor with the reason the trust protector is normally an attorney or CPA rather than some friend or close relative of the trust beneficiary. Hence, the reason for this very abbreviated description of why a Trust Protector is named in most ongoing trusts, and is not needed for trusts that call for outright distribution of inherited assets to a beneficiary who attains a certain age.

For more information on this topic, please call us for a consultation.

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