A Trust Protector is someone with special power
over a trust. The Trust Protector is not the Trustee, although in some
documents they could be called a Special Co-Trustee or a similar name. The
Trust Protector does not have control over day-to-day operations of the trust.
Rather, they are often given the power to do things the trustee could not or
should not do for various reasons. For example, they might act instead of the
trustee when otherwise there would be a conflict of interest. Another example
might be life insurance. If the trust owned insurance on the trustee’s life,
the exercise of incidents of ownership of the policy by the trustee would cause
inclusion of the value of the policy in the trustee’s estate. Thus, the
exercise of such incidents of ownership would be done by the Trust Protector,
keeping the value of the death benefit from being included in the trustee’s
taxable estate. (Either way, the life insurance would go as the beneficiary designation
indicated. But, without the Trust Protector exercising control over the policy
instead of the trustee/insured, the policy would be taxed to the trustee even
though it was not received by them.)
In some circumstances, the Trust Protector may
even have the authority to amend the trust, for example due to a change in
beneficiary circumstances or a change in law. This can add great flexibility to
a trust. For example, the Trust Protector might be used to change a
beneficiary’s trust from being a “support” trust to a completely discretionary
trust to allow the beneficiary to have more asset protection. The use of the
Trust Protector’s amendment power can sometimes be another way to modify a
trust.
As you can see, using a Trust Protector add great
flexibility to a trust.
