The Best Estate-Planning Tool You've Never Heard Of

By Burg, Brad | Medical Economics, March 5, 2001 | Go to article overview

The Best Estate-Planning Tool You've Never Heard Of


Burg, Brad, Medical Economics


The "trust protector," a relatively new concept, may be the key to helping your heirs avoid losses, fights, and other misery.

You don't want to experience what these doctors went through:

"When I was 10," recalls a Midwestern surgeon, "my father died suddenly, and my uncle became the trustee of his estate. He managed the investments badly, and their value dropped about 30 percent"

"My brother Paul and I were co-trustees for my irresponsible brother Bob," says a Nebraska FP. "Soon Paul began promising Bob we'd hand out more money from the trust if Bob would invest in Paul's real estate partnerships. It took a terrible family fight before Paul finally let my sister take over for him"

A trust officer admitted that his bank was so worried about losing principal in trust accounts that they kept most of the money in their own CDs," remembers a Missouri ophthalmologist. "They were happy if the trusts grew 2 to 4 percent a year. And most families never complained."

"I've seen a doctor's family greatly hurt by a badly mismanaged trust," says Gideon Rothschild, an estate planning attorney in New York City. The trust was established by the doctor's grandmother at a bank's overly conservative trust department. The bank was a lousy investor, and the money saw no growth for years-a great misfortune but alas, no crime. "The beneficiaries had no way to discharge the trustee, since the bank wasn't mishandling the trust:' says Rothschild. "Short of legal wrongdoing, it can be very difficult to remove a trustee, and it often requires a long court procedure."

In all of these situations, a trust protector could have helped. That's a specially appointed individual who can watch over a trust and, if necessary, replace a trustee or make other changes. The concept has long been needed, say many experts, but it's so new that little law exists on it. Moreover, the term "protector" can mean different things to different people. In fact, many estate-planning attorneys aren't even familiar with the idea. So you may need to check out the details yourself, before deciding whether to call an attorney about adding a protector to your plans.

A trust protector who can come in as a white knight, or at least a mediator, may offer a valuable failsafe mechanism. "You'd have someone in place who could resolve disputes readily, without the pain of long fights-or the agony of legal fees:' says attorney Stephan R. Leimberg of Bryn Mawr, PA. "Some families may have a natural diplomat who's the obvious choice; in other cases, you might prefer someone who's not even related to you. Every situation is different, but filling that position can provide some real breathing space."

Simply considering the idea of a trust protector may stimulate some worthwhile thinking about who your trustees should be, how their power should be defined and limited, and other aspects of your estate plan. Let's take a closer look.

Where did the protector idea come from--and why is it catching on now? In a way, it came from beyond the sea: People who transfer assets to overseas trusts for protection must give up control to an overseas trustee-and they're often concerned that they may later want to have those assets moved elsewhere. "In that setting, it's common to provide for a protector, a third party who can have certain kinds of authority over a trustee:' says Rothschild. But why has this idea come ashore now?

First, because of changes in domestic law. "Formerly, trusts couldn't legally last much longer than a generation:' notes attorney Mark B. Edwards of Mooresville, NC. "So yould typically set one up for children who'd receive all the principal by age 35 or so. That's not such a long time frame to plan for." But now some state laws are changing, allowing trusts to be perpetual

At the same time, bank trust departments-which once did seem perpetual-now appear much less so. "Your friendly neighborhood bank may be bought by an international conglomerate, and its management and policies could be overhauled with no warning," says Norristown, PA, attorney David J. …

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