Imagine putting a significant chunk of your wealth in an irrevocable trust in another country – across the world or in another time zone, outside the reach of U.S. courts. What would stop the trustee from mismanaging the trust?
This is a concern for many trust makers, especially when it comes to offshore asset protection trusts like a Cook Island Trusts. While these types of irrevocable trusts come with distinct legal protections many individuals get nervous when they start crossing international borders.
You’ll need to appoint a foreign trustee to set up an offshore trust. But you may not want to hand over control of your assets to one individual or company. You also may not have as much supervision over them as you would if they were in the United States.
That’s where the role of trust protector comes in. A number of companies offer services as trust protectors for offshore trusts on foreign soil – AsiaCiti, Guardian Protectors, New Zealand Trustee Services, and SouthPac, just to name a few. What exactly do these companies do? And do you need a trust protector to watch over your assets?
The answer is no, you don’t need one. But you should strongly consider having one. The advantages of having a trust protector far outweigh the effort it takes to set up this safeguard.
What Is the Role of a Trust Protector in an Offshore Trust?
Unfortunately, not all trustees can be, well, trusted. Without the proper safeguards, a trustee could drain a trust of its assets and frustrate its entire purpose.
A trust protector acts as a watchdog over a trustee, supervising the trustee’s actions. The most important power of a trust protector is to terminate the trustee and appoint a replacement trustee.
In many cases, trust protectors get the ability to appoint a successor trustee if the original trustee gets fired – with the caveat that they cannot appoint themselves. However, if you give your trust protector the ability to appoint a successor trustee, make absolutely sure that your legal counsel has properly vetted your Trust Protector.
Examples of Trustee Misconduct
A trust protector can step in to protect your assets if the trustee:
- Fabricates a dispute with you, the beneficiary of the trust, in order to drain trust assets through increased fees, litigation costs, or other inappropriate actions
- Finds ways to “milk” more fees from the trust by fueling disputes between beneficiaries or heirs and then billing for their role in “resolving” those disputes
- Hires investment advisors not align with your objectives
- Mishandles your assets after you pass away, leaving your heirs and beneficiaries no recourse but to sue, embroiling your trust in costly litigation
- Develops a grudge against you or one of your other heirs or beneficiaries, making them unable or unwilling to fulfill their duties as trustee
- Engages in any other behavior which you do not approve
You can also add provisions that give your trust protector the ability to:
- Make changes to the language of the trust document
- Add or remove beneficiaries from the trust
- Adjust distributions based on the beneficiaries’ lives
- Change the jurisdiction of the trust or terminate the trust
Since the use of trust protectors took off for offshore trusts in the 1990s, the role has also become common in domestic asset protection trusts. Some states – like Alaska, South Dakota, and Nevada – created laws with similar terms as offshore trusts, hoping to draw in some of that business by offering comparable advantages. For example, Nevada Asset Protection Trusts come with the role of trust protector already defined under state law.
Trust Protectors and Fiduciary Duty
The role of a trust protector is different compared to a trustee in one big way: a trustee has fiduciary duties that they owe to the trust, while a trust protector is not necessarily considered a fiduciary. This changes the legal obligations of each role.
When someone has fiduciary duties, that means they have a legal duty to act according to a certain standard. They can be held liable if they fail to live up to these duties.
The fiduciary duties of a trustee depend on local law, but usually include loyalty, impartiality, avoiding conflicts of interests, and proper preservation and management of trust property. The trustee also has legal duties to inform beneficiaries of developments and trust accounting.
In contrast – in some jurisdictions, trust protectors are not fiduciary roles by default, while other state laws hold the opposite. Many states are silent on the matter, allowing the trust document to determine which powers and duties are granted to the role.
The more responsibilities you start giving to a trust protector, the more they become a de-facto “co-trustee,” where the lines separating fiduciary duties begin to blur. It’s important to keep your trust protector’s roles clear-cut to avoid these legal gray areas, especially when you’re setting up an irrevocable trust meant for asset protection.
For example, your trust protector should not be someone who is “related or subordinate” to you. Failing to keep these boundaries in check could result in the protection being compromised.
Are Trust Protectors Necessary for Offshore Trusts?
Even if you don’t technically need a trust protector, many trusts now come with trust protector provisions. After all, it doesn’t hurt to safeguard your assets with as many protections as the law can afford you. It’s no exaggeration that a little bit of extra planning ahead of time can save you everything if your relationship with a trustee turns sour.
But, like anything else when it comes to asset protection, it’s important to cater the terms of your trust to your needs. When you’re putting the fate of your assets in someone else’s hands, you’ve got to make sure your intentions and instructions are clear.
Offshore asset protection trusts are an excellent way to protect your assets for as long as you need. When you have the proper protections in place, you know your wealth is in safe hands. For a personalized and secure approach to offshore asset protection trusts, click here to talk to our experienced team now or call us at 833-ASK-BLAKE.