Trusts Protectors: A Concept Whose Time Has Come

November 07, 2016

By: C. Arthur Robinson, II

In the evolution over the last 50 to 60 years of trusts in a variety of contexts including offshore trusts, a new concept has surfaced which is now being more broadly applied in the context of estate and asset protection planning. The concept is one of a trust protector.

A protector concept evolved in the context of offshore trusts which most usually were deemed to be offshore trusts because a foreign jurisdiction was the location (situs) of the trustee for the trust. In creating these trusts it was often the case that the trust would be deemed to be a foreign or offshore trust and for purposes of preventing exposure to liability, very often irrevocable trusts were used.

In providing for irrevocable trusts, it became apparent that the ability to alter the trust provisions, to make changes in who was acting as trustee, to change the location or situs of the trust; and, a variety of other things would often surface in the context of these foreign trusts. As a consequence, over a series of several decades the concept of a trust protector gradually evolved. In a typical asset protection context the creator of a trust who might also be one of a series of beneficiaries could create an irrevocable trust, select an appropriate jurisdiction so that the trust would be an appropriate offshore or foreign trust and the individual who occupied the position of grantor and initial beneficiary, would make the trust irrevocable so that their control over the trust was not such that creditors could reach assets which were contained within the trust.

In endeavoring to make these arrangements more responsive to the both changes in circumstances and the evolving changes in families which occurred over time, the concept of a protector who could provide input to the trustee and under some circumstances, make changes to the trust such as hiring and firing beneficiaries, changing the situs of the trust, adding additional beneficiaries which were within classes defined within the trust instrument and a variety of other powers began to evolve. Today this concept is robustly applied in offshore trust planning.

Interestingly, it also can and should be applied for irrevocable trusts which are created in the United States whenever an irrevocable trust is created, whether domestic or international. The possibility exists that the trust at some point during its term will need to be adjusted in one fashion or another. This is especially true in using irrevocable trusts, which are often used in the context of advanced estate planning as well as for asset protection purposes. The inherent irrevocability of trusts is often time intended to separate control over the assets from the grantor who created the trust and providing a trust protector can permit a trust grantor, who may also be a beneficiary of the trust, from having no ability to influence or otherwise control the disposition and administration of the trust and its assets.

One question which has arisen over time is whether trust protectors are fiduciaries. This is an open question in a number of states that have enacted protector or trust advisor statutes but in Virginia a trust protector is a fiduciary. Under the Virginia statute, a trust advisor is in fact a fiduciary and so a trust protector or advisor has fiduciary duties with respect to the trust, its grantor as well as the beneficiaries.

The state of the art continues to evolve vigorously especially in the area of domestic trusts, which because they are irrevocable, can incorporate trust protector provisions to increase their adaptability, flexibility, and utility for trust grantors and their families and other beneficiaries. It is certainly the case that trust protectors have a role which can be extremely beneficial in the right circumstances. We at Wolcott Rivers Gates are familiar with these issues and are in the position to advise our clients with respect to the same.