What Is a Trust Protector

In my practice, I draft a lot of trusts.  There are various reasons why a trust may be the appropriate solution for a client.

At its core, a trust is a fiduciary relationship.  A trust is created when one person of entity, such as a bank, is holding property for another individual or entity.  The person holding the property is called the “trustee.”  The person for whom the property is being held is called the “beneficiary.”

The written document that many people would call the trust is actually the trust agreement.  The trust agreement is the contractual document that establishes the terms of the trust.  The trust agreement might say something such as “My trustee shall hold and administer the assets and income of the trust for the health, maintenance, and support of my son, the beneficiary of this trust.”  The agreement tells the trustee what to do with the assets of the trust, that is, hold the assets for the son’s health, maintenance, and support.

The person who has the trust agreement drafted and who places the assets in the trust is called the “grantor” or “settlor.”  The grantor typically goes to an attorney and hires the attorney to draft the trust agreement, then the grantor places his assets in the trust for the trustee to hold for the benefit of the beneficiary.

There are many reasons why a grantor might establish a trust.  For instance, the grantor may be a father who has a son who has issues with drugs or alcohol, or the grantor might have a son who cannot effectively manage money, or the grantor might have a son who is disabled.  For any one of these reasons, the grantor might want to establish a trust.

Let’s assume that Mr. Smith has a disabled son, aged 30.  Mr. Smith wants to establish a special needs trust for his son.  The son receives government entitlement benefits, such as Medicaid, so it is important that Mr. Smith choose a trustee who knows the Medicaid program and how the trust might affect the son’s eligibility for Medicaid.  The proper administration of such a trust is important, because an incorrect distribution from the trust could negatively impact the son’s entitlement to Medicaid benefits.

The father/grantor might want to choose a professional trustee, such as a bank, to administer the trust.  Since the son is receiving Medicaid benefits and since the son might live for decades after the father’s death, Mr. Smith wants a trustee who understands the Medicaid program and who will be around for a long time after he dies.  A bank is the logical solution for both of these issues.

Banks typically have trust departments.  Many of these trust departments are very familiar with administering trusts and administering trusts in a manner that does not negatively impact government entitlement benefits.  Moreover, a bank is an entity, not an individual, so a bank does not die.  A bank can “live” for hundreds of years.

A problem that might arise in choosing a professional trustee, or any trustee for that matter, is that there may come a point in time when it would be good to remove the trustee.  Perhaps the trustee and the beneficiary aren’t getting along.  Perhaps a better trustee comes into being, such as a new organization that administers trusts.

A trust protector is a person or entity who is given the authority to remove a trustee and replace the trustee with another trustee.  Typically, the trust protector cannot choose himself to be the trustee or someone who is related to him.

By naming a trust protector, the grantor can build in protection for the beneficiary in the event that a trustee needs to be replaced for any reason that the trust protector deems appropriate.  Knowing that he/they can be removed, also tends to keep the trustee on their toes.

Protecting Privacy Through a Revocable Living Trust

For some people, privacy is important.  They don’t want others knowing about their personal affairs or their financial affairs.

In my practice, I deal with clients’ estate planning needs.  Many issues affecting estate planning involve addressing events that will happen after the client dies.  Some people cherish the idea of privacy even after their passing.

Most estate plans aren’t surprising.  For instance, if Mr. Smith has four children, his last will and testament probably says “I devise my entire estate to my four children, to be divided equally between them.”  There is little surprising in this type of Will.

In some instances, though, Mr. Smith may not leave his estate to his children equally.  Or, Mr. Smith might have a child who has an issue—such as, problems with drugs or alcohol or a disability—and he might not want the world to know about his child’s issue or how he decided to address that issue.  Even if none of his family members have an issue, Mr. Smith may not want the world to know the manner in which he left his estate.

For Mr. Smith, maintaining his privacy—even after his death—is important and it may even have a beneficial effect for his surviving family members.  For instance, it may be best that the world not know his son has a problem with drugs.

If Mr. Smith addresses his son’s drug problem in his Will, his son’s drug problem will become a public record when Mr. Smith’s last will and testament is admitted to probate.  A Will is admitted to probate with the surrogate of the county in which Mr. Smith died a resident.

Once a Will is “probated,” it becomes a public record. Any member of the public can go to the surrogate’s office and look at a copy of Mr. Smith’s Will.

In order to avoid Mr. Smith’s affairs from becoming a public record, Mr. Smith might consider using a revocable living trust as a Will-substitute. A “trust” is a fiduciary relationship, meaning that it is a relationship in which one person, called a trustee, is holding property for another person, called a beneficiary.  Whenever one person is holding property for another person, a trust exists.

In New Jersey, a trust must be in writing to be valid, so there must be a written trust agreement. The trust agreement is the legal document that states the terms by which the trustee holds the property for the beneficiary.

A “revocable” trust is a trust that you can change anytime you want. You can either modify the terms of the trust or revoke the trust in its entirety.

A revocable living trust is typically used as a Will-substitute. A Will passes a decedent’s property to others after he dies.  A revocable living trust typically does the same thing, so for this reason, such a trust is often called a Will-substitute.

The benefit of a trust over a Will is that a trust does not have to be probated. Since the trust does not have to be probated, the terms of the trust never become public.  Since the terms of the trust never become public, the public cannot see the issues the trust addresses.

Going back to Mr. Smith, through a trust, Mr. Smith could address his son’s drug issues by stating that any inheritance passing to his son must be held in trust and that the son must undergo periodic drug testing in order to receive distributions from the trust. Leaving the son the money in this manner protects the son because he doesn’t have wholesale access to the money and because the son’s issues with drugs aren’t made public.

Of course, anyone might appreciate privacy, whether a family member has an actual issue or not. Privacy is a personal desire, but the point is, a revocable living trust permits you to retain your privacy even after your death.