I often use trust protectors in trusts that I draft to provide flexibility when the trust becomes irrevocable. The position of trust protector is a unique role. The trust protector is not intended to be responsible for the day-to-day functioning of the trust. That is the role of the trustee. Instead, the trust protector oversees the trustee and ensures that your trust is administered in a way that carries out your intent.
The powers given to a trust protector are quasi-judicial in nature. So the trust protector is kind of like a judge. He or she may step in when the matter could otherwise end up in court.
There are several reasons why having a trust protector may be helpful. One common reason to add a trust protector is to ensure that changes can be made to the trust in order to adapt to future changed circumstances, such as changes in the law, without having to ask a judge to make the change. A second reason is to keep the trustee in check. This may be particularly important when there is a professional trustee, such as a bank. If the trustee is not carrying out your wishes, the trust protector can remove the trustee and appoint a new trustee. It is also helpful to have a trust protector when a trustee dies or becomes incapacitated, and no successor is named.
The trust protector should be someone who understands the wishes of the grantor but who is not the grantor, a beneficiary, or someone related to the grantor or a beneficiary. Although it seems that a family member may be in the best position to understand the wishes of the grantor, there can be negative tax consequences to the grantor, the beneficiary, and even the trust protector, if the trust protector is "related or subordinate" to the grantor or a beneficiary of the trust. The term "related or subordinate" is defined in the tax code as someone who is a spouse, parent, descendant, sibling, employee or a business controlled by that person.
I take several steps in my trusts to avoid those potential problems. For instance, I always limit the distribution standard for an interested trustee, and require that the trust protector be someone who is not related or subordinate to the grantor or the beneficiary. This conservative position should provide better asset protection and should avoid inadvertent estate tax inclusion.
The biggest concern for someone who is asked to serve as a trust protector is what potential liability that the protector may face. If the trust protector's duties are not worded correctly, he or she could be subject to some level of liability, and could even be treated as a co-trustee. This often depends on what duties are assigned to the trust protector and the specific language of the trust instrument. Trusts that I draft are carefully worded to limit the role of the trust protector and the potential liability.
With proper drafting, the trust protector can be called upon to act only when it is necessary to help fix a problem that otherwise either would not have been fixable or would have required a court order. This added feature may never be needed. But it can keep your trustee from straying from your desires and can save a lot of time, money and frustration when a change is necessary.