Posts Tagged ‘estate’

Providing Flexibility by Adding Trust Protectors to Your Estate Planning

May 2, 2011

Trust protectors (aka Trust Advisors) have long been used in British Commonwealth countries, originating with offshore asset protection trusts.  With these trusts, their role was limited mostly to overseeing the foreign trustee and to make sure the trust maker’s intent was fulfilled.

Today, trust protectors are increasingly being used with trusts that are located here in the U.S. And, while their main job is still to oversee the trustee and make sure your intentions are followed after unforeseen changes in the law and other matters, they can be given additional duties that will provide you and your beneficiaries with added flexibility, security and peace of mind.

What is a Trust Protector?

A trust protector is someone you name in your trust document to oversee your trustee and make sure your trust carries on in the way you intended. This should be a trusted friend or advisor, someone who knows and understands your motives, family values and desires when you created your trust. In the case of a trust that will last many years, like a multi-generational trust, a trust protector is often an institution rather than a specific person.

A trust protector can begin to act immediately (for example, if your trust is irrevocable), or can take an active role only under certain circumstances (for example, at your incapacity or death).  Think of your trust protector as your substitute, someone who can speak for you if there is uncertainty in interpreting your trust’s instructions or the law changes and that change affects your trust.  Your trust protector also can provide guidance for the trustee and protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching, or is unresponsive.

How Much Power Should You Give Your Trust Protector?

The trust protector’s duties and powers are defined in the trust document, and can range from extremely limited to extremely broad.  How much power you give your trust protector is completely up to you?  Traditionally, the trust protector’s role has been a defensive one: to ensure that the trustee carries out the grantor’s wishes and to protect the beneficiaries from an under-performing or over-reaching trustee.  But if you give your trust protector more power, the role can become a proactive one, allowing your trust protector to act before wrongs occur.

Some of the duties and powers you can give your trust protector include:

Oversee, Remove and Replace the Trustee

Your trust protector can oversee your trustee, providing guidance in interpreting your trust’s instructions and holding the trustee accountable.  You can also give your trust protector the power to remove and replace the trustee.  This authority can be restrictive, limited to specific bad behavior by the trustee that can include being unresponsive to the beneficiaries, not providing acceptable record-keeping, reporting and tax filings, or charging too much for services.  The authority can also be extensive, allowing the trust protector to remove and replace the trustee for no specific reason (without cause).  Usually potential replacements (successor trustees) are named in the trust document, but it may also be possible for the trust protector to select a successor trustee.

Just having these oversight provisions in place is often enough to keep a trustee in line.  And if it does become necessary to remove a trustee, it is much easier for the trust protector to do this (because he or she already has the authority) than for the beneficiaries to reach an agreement and ask for court removal, which is a time-consuming, expensive and unpleasant procedure.

You can also allow your trust protector to control spending by the trustee, and even limit the trustee’s compensation, which can go a long way toward preventing disputes.

Resolve Disputes

You can also make your trust protector the mediator if disputes should arise between co-trustees, between the trustee and a beneficiary, or even among beneficiaries.  Having the trust protector as the final arbiter in disputes over interpreting the provisions of the trust document can sometimes avoid costly and unpleasant trust litigation.

You could even give your trust protector the ability to sue or defend lawsuits involving the trust assets.

Modify Your Estate Plan

You may also want to allow your trust protector to actually make some changes to your trust.  For example, you could allow your trust protector to change the situs (location in which the trust is regulated) to a state that has more favorable asset protection or income tax laws, should the need arise.

You could also give your trust protector the power to amend or revoke the trust agreement, in its entirety or in part; to add or delete specific beneficiaries or classes of beneficiaries; to change the terms of distributions to beneficiaries; even pour into another trust for the same beneficiaries, if your state allows that.  These powers may be extremely beneficial to the trust’s ability to follow your intentions as tax laws change, as well as to protect the assets from potential predators and creditors.

Delegate Responsibilities among Advisors

Traditionally, and still with many trusts, the trustee handles everything – record-keeping, tax returns, distributions, investing, etc.  But over time, people have discovered that it is beneficial to allocate some of this responsibility to different parties that have different strengths.

Consider giving your trust protector the ability to appoint, oversee and substitute other professionals. For example, the management of your trust could be divided like this:
• An Administrative Trustee maintains trust records, accounts, and tax returns. If the trust is governed by laws in a different state (often for tax or asset protection reasons), the administrator will usually be a local institution or professional.
• A Distribution Trustee or Adviser that has discretion and can make or withhold distributions from the trust to the beneficiaries.  Typically this will be an objective third party, which insulates the trustee from pressure and liability associated with the power to distribute trust assets.  This is especially important if a beneficiary’s creditor tries to force distributions from the trust.
• An Investment Trustee or Adviser oversees or directs trust investments, and may be granted specific powers, including:  to hold, maintain or cancel life insurance; to direct the sale or exchange of property; and to open, manage and close accounts. A general trustee is held to the prudent investment standard because of its fiduciary duty and, as a result, has restrictions on the investments it can make.  Having an investment advisor that is not bound by the prudent investor rule or held to the same standard will provide more flexibility in investments.
• The “General” Trustee handles everything that is not delegated.

Who Should Serve as Trust Protector?

Ideally, your trust protector should be someone who knows you, your motives, desires, and intentions when you established your trust.  It cannot be you or a family member who is a beneficiary of your trust because of possible tax complications.  An unrelated third party – a family friend, an advisor, the attorney who drafted your trust, or your family CPA – is often the best choice.  They obviously must be willing to serve in this capacity, and your trust document should specify if they are to be paid for their services.

Planning Tip: There is currently very little case law on trust protectors, and they are not required by law to be fiduciaries, as trustees are.  Your trust should clearly state whether you want your trust protector to act in a fiduciary capacity and be held to a higher standard, or not act in a fiduciary capacity.

Who Should Have the Power to Remove or Replace the Trust Protector?

This probably should not be you, unless the replacement is explicitly limited in the document to someone who is not related or subordinate to you.  You could possibly give this power to the beneficiaries or an unrelated third party.  Leaving this decision to the courts would be time-consuming and costly.

Planning Tip: If your plan has asset protection elements, no beneficiary should have the power to remove or replace the trust protector. Doing so could cause your trust to be under the control of a beneficiary and that could put the entire asset protection part of your plan in jeopardy.


The use of trust protectors is an excellent way to provide added flexibility, security and peace of mind in trust planning, especially since you can control how much power the trust protector is given.  If you would like to discuss adding a trust protector to your estate planning, please call our office. We are ready to help.

Test Your Knowledge

1. Using a trust protector is a new concept in estate planning.  True or False

2. A trust protector’s main job is to keep the beneficiaries in line.  True or False

3. How much power you give your trust protector is up to you.  True or False

4. A trust protector can only remove a trustee for very bad behavior.  True or False

5. A trust protector is never permitted to make changes to the trust document.  True or False

6. A trust protector is a good choice to be a mediator between the trustee and the beneficiaries.  True or False

7. Your trust protector should be someone who knows and understands your motives, family values and desires when your trust is created. True or False

8. A trust protector can protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching or is not being responsive.  True or False

9. The trustee is required to handle all administrative and investment duties of your trust and can never delegate to others.  True or False

10. You can be your own trust protector.  True or False

Answers: 1, 2, 4, 5, 9 and 10 are false.  3, 6, 7 and 8 are true.

A Unique Opportunity

December 23, 2010

The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.


Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate.  The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.


The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax.  This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%.  In two short years the rate goes back to 55%.


There are three common scenarios offering planning opportunities.  First, make gifts before December 31, 2010 to Skip Trusts.  These are trusts that you create for grandchildren, great grandchildren or more remote generations.  There will be no generation skipping transfer tax.  The gift tax is 35%, after use of the $1 million lifetime gift exclusion.  This strategy is most effective for large taxable estates.  On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules.  For 2010, you will allocate nothing to the GST Exemption because there is no estate tax.  Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).


The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust.  Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%.  After this year, the distribution will be subject to at least a 35% tax rate.  Sometimes, there is concern about beneficiaries getting outright distributions.  Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.


The third planning opportunity deals with clearing any loans made to trusts.  The most common scenario involves Irrevocable Life Insurance Trusts.  Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used.  With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return.  If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.


I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren.  We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

Eldercare Locator – A Free, Public Service For Connecting Older Adults and Caregivers with Community Resources

October 27, 2010

The Eldercare Locator is a service of the U.S. Administration on Aging.  It’s been around for nearly 20 years.  Its toll free number is 800-677-1116.  Its website is  It  provides information about long-term care alternatives, transportation options, caregiver issues and government benefit eligibility.  This information is also available in Spanish and other languages.  There is an extensive database of links, publications, and other resources.

Estate Tax Problem… no laughing matter

May 5, 2010

Bloomberg BusinessWeek has published an interesting article titled “Mind the Estate Tax Gap.” The article focuses on some of the significant carryover basis issues under current law, suggesting that allocation questions fall to personal representatives and trustees, who face potential lawsuits from disgruntled heirs and penalties from IRS. Also, as has been said for some time, this presents a record-keeping nightmare. Imagine trying to track capital improvements to a home or determine all the stock splits that occurred in a stock over 50 years.

People have been making morbid jokes about bumping off their rich relatives in 2010, a year that has no federal estate tax, but few are laughing about it now. The tax is set to return, at a 55% rate, on January 1, 2011. While heirs of the ultra-rich who die this year may enjoy an estate tax break, this gap year is having unintended consequences. Far larger numbers of affluent families who suffer deaths this year could wind up paying stiff capital-gains taxes on inheritances. That’s because of the disappearance of what’s known as the “step-up” in basis, which allowed assets to be revalued to fair market value for income tax purposes at the time of death. Many people are going to be worse off than before.

Under last year’s rules, estates below $3.5 million (or $7 million for a couple) were exempt from the estate tax; people above those limits were hit with rates as high as 45%, but assets were revalued at the time of death, and “stepped up” to their full current value and not subject to capital-gains tax on past appreciation. When the estate tax went on hiatus, the “step-up in basis” rule for valuing assets went, too, so heirs are suddenly liable for capital gains on the past appreciation of assets they inherit and sell. For those who are bequeathed homes that have grown in value, family businesses that have expanded, or stocks that have risen in price, the old “step-up” rule let them start with a clean slate, owing no capital-gains taxes when they sold the assets. Not anymore.

A copy of the article can be found here.

A remedy for estate tax problem?

April 16, 2010

I received an email today about Senate Bill 670, stating that the Elder Law Section of the Wisconsin Bar Association is joining the RPPT Section in support in principle of this bill relating to disposal of a decedent’s property.

The Elder Law Section works to develop and improve laws that affect the elderly, and promotes high standards of ethical performance and technical expertise for those who practice in the area. RPPT pertains to the law of real property, probate and trusts. They support this bill as a remedy for problems experienced by families with estate planning gone awry because of the repeal of the federal estate tax in 2010.

Congressional inaction has resulted in a great deal of uncertainty as to the application of thousands of Wisconsin estate plans (and millions nation-wide) which were premised on, and designed around, the existence of such a tax. Many other states have taken, or are considering, legislative solutions to resolve the issues created in testamentary plans.

The primary issue is that for decades, estate planning attorneys and other planning solutions have utilized formula clauses when creating estates plans or trusts. These formula clauses determine the distribution of assets in an estate or trust while accounting for taxation of such estates or trusts. With no federal estate tax in 2010, there can be (1) significant ambiguity in the interpretation and implementation of these formulas; and (2) the inadvertent disinheritance of children, spouses and charities.

Wisconsin law has long provided that the intentions of a deceased person regarding the disposition of assets are to be respected. Plus, greater certainty in the application of estate planning instruments is in the public interest. SB 670 will further longstanding public policy, reduce protracted litigation and court proceedings, and minimize family and financial dislocations because it says estate planning instruments are to be administered in a manner that is most likely consistent with a deceased person’s expectations and intent.

Estate Tax Reform Update

April 6, 2010

You may be interested in the April 1 AALU Bulletin (No: 10-37), Update on Estate Tax Reform: Developments and Dynamics, which states that three factors shape the ongoing environment for the federal estate tax:

  1. A packed congressional schedule;
  2. A focus on deficit reduction; and
  3. The upcoming mid-term elections.

The AALU concludes that we may have a clearer picture once Congress returns to session this week but that the Senate may be hesitant to pass a reconciliation bill (which could include the estate tax) because of the recent health care reconciliation bill. If it is not included in a reconciliation bill (which requires only 51 votes), 60 votes would be necessary to pass estate tax legislation:

“The difficulty in finding 60 votes may lead to either (1) reversion in 2010 to a $1 million exemption and 55% rate or (2) a short-term extension of tax cuts, including the estate tax on a two-year basis at $3.5 million exemption and 45% rate, possibly during a lame duck session (when Congress returns after November elections).”

A copy of the complete bulletin is available online here.

Estate Tax Reform

January 6, 2010

There’s another fine mess you’ve gotten us into…

You can hardly pick up a newspaper right now without reading about the estate tax mess we’re in.

There are winners and losers. The Economic Growth and Tax Relief Reconciliation Act of 2001 lowered estate taxes and eliminated them entirely in 2010.

Unfortunately, Congressional budget rules required the act to have a sunset provision, which means the entire act would disappear on December 31, 2010. Then we would be back where we started in 2001 – no reform. But who cared in 2001? There were nine years to address the problem.

Well, here we are in 2010 and Congress has done nothing. Right now there are all sorts of predictions, but no one really knows what will happen. The question is what to do with people dying in 2010, before new legislation is enacted? Many in Congress want to adopt legislation in 2010 and make it effective retroactive to January 1, 2010, but that may be unconstitutional.

Regardless, you need to review your estate plan now, especially if you are in a second marriage, have a marital trust and/or family trust.  Otherwise your plan might not work as you intended.

Only put off until tomorrow what you are willing to die having left undone. – Pablo Picasso

For more detailed information, you can read our latest Wealth Counselor newsletter, Planning After “Repeal” of the Federal Estate Tax, available here.

(Swendson/Menting Law Ltd. offers this free monthly newsletter to our clients, friends and strategic partners that addresses current issues and developments in the law. If you would like to receive future editions, please contact us.)