A Watchdog for Your Assets: Trust Protectors and Offshore Trusts

An offshore asset protection trust is an attractive solution for individuals looking to protect their wealth from lawsuits and to pass on their legacy to their families.

But 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? What legal recourse would you have?

This is a concern for many, especially when it comes to offshore asset protection trusts like a Cook Island Trusts. While these types of trusts come with distinct advantages, many individuals get nervous when their money starts crossing international borders.

You must appoint a foreign trustee to establish 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 a trust protector. But you should strongly consider having one.

A trust protector brings advantages that far outweigh the effort it takes to set one up. And if you ever need your trust protector to step in, you’ll be glad you assigned them as a safeguard far in advance to make sure the trustee handles your assets properly.

Like any asset protection planning, you should proceed with a personal approach catered to your asset protection needs and goals. Trust protectors exist to help protect your vision for your trust. An asset protection attorney can help you set up personally-tailored terms to make sure that the trust protector understands their role and knows when to step in.

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 powers of a trust protector involve terminating the trustee and appointing a replacement trustee. Essentially, a trust protector is a fail-safe.

Your trust protector can also make sure your trust gets managed according to your wishes even if legal and factual realities change – for example, if one of your beneficiaries passes away unexpectedly or even if a conflict arises between your trustee and beneficiaries.

A trust protector could be a family member, a friend, or a third-party professional – like the companies mentioned above. In a best-case scenario, you choose a trust protector who is entirely independent of you, as this affords the greatest firewall against tax penalties.

Although trust protectors can get the ability to appoint a successor trustee if the original trustee is removed, this should come with the caveat that they cannot appoint themselves.

If you give your trust protector the ability to appoint a successor trustee, make absolutely sure that your legal counsel has properly vetted that candidate so that you can trust their judgment. Otherwise, the protector could appoint a trustee who is essentially under their thumb and the two could work together against the best interests of your trust.

Your lawyer can make sure your trust document has the necessary language to protect yourself from these types of situations, for a truly airtight asset protection plan.

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 aligned 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
• Veto trust distributions or trustee decisions

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 perform these duties. Specifically, the trust beneficiaries could sue the trustee for a breach of fiduciary duty and try to recover any losses suffered by the trust.

The fiduciary duties of a trustee depend on local law, but usually include the duty to:

• Act with loyalty, impartiality, and no self-dealing
• Avoid conflicts of interest while administering the trust
• Preserve and manage trust property according to the language of the trust
• Inform beneficiaries of developments and trust accounting
• Keep personal funds separate from trust funds
• Properly invest the trust’s assets for growth

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.

But 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 generally should not be someone who is “related or subordinate” to you. The more independent they are of your power and influence, the more robust the tax shield around your trust. If you fail to keep these boundaries in check, you may lose the legal protections that come with these types of offshore trusts. And that would defeat the whole purpose of your asset protection plan.

Are Trust Protectors Necessary for Irrevocable 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.

The more specific you are about your wishes when setting up your trust, the more likely your vision will actually get carried out the way you plan. This is especially true for offshore irrevocable trusts, where you no longer have direct control over the assets you transfer to the trust. Making any changes after the fact will be harder than planning ahead.

Even if you work with a trust protection company, you should still talk to a lawyer about the terms of your trust. Your attorney can make sure whichever trust protector you choose will have an appropriate balance of power, without putting your assets at risk of abuse.

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 786-559-1209.