The Trust Protector’s Role in Offshore Asset ProtectionOct 11 • Categorized as Asset Protection,Offshore Banking
by Bob Matthews, Global Asset Advisors, Inc.
How to Properly Use a Trust Protector with Offshore Asset Protection
When presenting potential clients with different asset protection options, systems, and strategies, one of the questions asked is if I would be willing to act as their Trustee. “No, I reply, but I will gladly offer my services as the Trust Protector.” The role of a Trust Protector takes up less of my time and I can educate the Trustee in his day-to-day responsibilities.
I. WHAT IS A TRUST PROTECTOR?
In an offshore Foreign Integrated Asset Protection Trust context, the role of “Asset Protector” is standard. Offshore countries have extensive networks of Trust Companies specifically designed to accommodate the implementation of Trust Agreements with ready Trustees. The election to have a Trust Protector, who is usually a United States Person, is a normal offshore business transaction.
Although in Foreign Asset Protection Systems the role of the Trust Protector is a standard, domestically in the United States, only a few states have a legally recognized the dual existence of Trustee and Trust Protector. The states that legally recognize the role of the Trust Protector are Alaska, Delaware, Idaho, South Dakota, and Wyoming.
The power of the Trust Protector is derived from the Trust Contract. The Agreement sets forth the dual function of the Trustee and the Trust Protector. While the Trustee can be a bank or trust company, or other financial institutions, the Trust Protector is usually a person close to the family, a CPA, accountant, or lawyer who is already the family consigliore.
II THE TRUST PROTECTOR’S POWERS
The Trust Protector’s powers can take any form, limited only by the wishes of the Grantor(s) and their imagination. Generally, the power granted the Trust Protector are:
a) Ability to remove or replace the Trustee. Often this is the only power granted to the Trust Protector. In cases where the Trustee is a corporate body (bank, trust company, insurance company, or professional trustee) if the Trustee is unresponsive or not performing to the Trust Agreement for the benefit of all Beneficiaries, the Trustee is not following the Grantor(s)’ Letter of Wishes, or changes in management, or investment choices, the Trust Protector can fire and replace the Trustee, at will, without explanation to the current Trustee.
b) Ability to veto distributions to Beneficiaries. Before distributions are to occur the Trust Protector may want to investigate the financial stability of the Beneficiaries. For example, if the beneficiary is being sued, The Trust Protector may withhold distributions, or the Beneficiary is undergoing divorce proceedings, or the Beneficiary may be too young, is under duress, mentally incompetent, unable to manage, or otherwise unavailable. The Trust Protector can override/veto the Trustee and withhold distributions temporarily or permanently make other arrangements such as buy the assets necessary for the benefit of the Beneficiary (buy a house, a car, sign a rental agreement, but have the Trust own the assets, make loans or make other provisions.
c) Ability to Veto Investment Decisions. This checking and balancing of investment decisions are based on the Trust Protector’s experience, prudence, and the Trust Agreement guidelines in protecting the assets for the Beneficiaries.
d) Ability to Sue and Defend Lawsuits Against the Trust Assets. The fiduciary duty of the Trustee and The Trust Protector as to save the assets of the Trust, at any cost, for the benefit of all classes of Beneficiaries.
e) Ability to Terminate the Trust. If in the opinion of the Trust Protector there are insufficient funds or the cost of administration is greater than available cost/benefit, the Trust Protector may terminate the Trust, as for example, if all beneficiaries have received their distributions based on age (over the age of 21) and there’s one minor beneficiary currently 8 years old, and there aren’t enough assets to administer the Trust for the next 13 years, the Trust Protector has the power to make the final distribution and terminate the Trust.
f) Ability to change the Trust’s Situs. The Protector’s ability to change the Trust’s Situs to take advantage of law changes or necessary steps to act in the best interest of beneficiaries if they move from low tax states to high tax states, i.e. from California or New York (high tax states) to New Hampshire, or Nevada (low tax states) or changes in laws occurring long after the initial implementation of the Trust Agreement.
g) Dispute Resolution. Ability to resolve deadlocks between co-trustees or in squabbling between the Trustee and/or Beneficiaries.
h) Trustee Checks and Balances. A Trust Protector can be empowered with the ability to control spending by the Trust/Trustee over a certain amount. This level of control is significant if disbursements of the Trust are in excess of pre-arranged amounts requiring two signatures of the Trustee and the Trust Protector i.e. in excess of $12,000.
III. THE ROLE OF THE TRUST PROTECTOR
The Trust Protector’s role is created by the Trust Agreement to add an additional layer of protection and is usually a person most familiar with the Grantor’s long-term financial and personal goals. A Trust Protector usually is the balance of power between the Trust Agreement, the Trustee, The Grantor, and the Beneficiaries.
Ideally neither the Trustee or the Trust Protector should be a family member, nor anyone related to the family by blood or marriage. Both positions should be independent of each other acting in the long-term interest of the beneficiaries. In reality family members are frequently the Trust Protector because they are the ones the Settlor trusts.
In many foreign trusts set up for U.S. persons, it is not unusual for the Settlor to also have the role of Protector. U.S. citizens are not normally familiar with the ends and outs of offshore arrangements and therefore like to maintain some semblance of control. One of the best ways to do this without jeopardizing the asset protection value of the trust is to be the Protector.
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