Setting Up a Trust to Protect a Child

By Nils Peter Johnson
Johnson & Johnson Law Firm
YOUNGSTOWN, Ohio – In a typical trust arrangement, an individual transfers property to a third party with a set of instructions on what to do with the property. The easiest illustration might be a parent who wants to set his/her assets aside for his/her child’s benefit in the event of the parent’s untimely demise.  Here, the assets would be delivered to the trustee, who would be tasked with implementing the parent’s written instructions on how/when to use the assets for the child’s benefit.  

Among the trustee’s responsibilities – written or unwritten – is the expectation that the assets be invested. If the trustee has this type of background and expertise, the trustee might reasonably make those difficult decisions. But to the extent most people do not have that skill set, identifying the right trustee might be overwhelming.

On one hand, the trustee should have these financial skills to prudently manage the child’s financial future. On the other hand, parents typically want a trustee who has personal familiarity with the child, and upon whom the child might rely on for nonfinancial guidance. For this reason, parents frequently identify a sibling of theirs (i.e. the aunt or uncle of the child) as the trustee of the child’s future trust, even though such aunt or uncle may not have a financial background. 

The aunt or uncle named as trustee may employ a financial advisor who would prudently invest the trust assets for the child. This happens routinely. But if the motivation for naming a family member as trustee is for the sake of active, day-to-day involvement in the child’s upbringing, why burden this family member with the liabilities associated with prudently investing trust assets? In other words, why not explicitly differentiate the aunt or uncle’s personal responsibilities in the trust from the financial advisor’s?

Ohio law recognizes a third party’s ability — other than a trustee’s — to direct the trust, called a trust protector, or trust advisor.  In the example above, the parent might designate the aunt or uncle as the trust advisor and task him/her with non-fiduciary responsibilities such as providing personal guidance to the child, or similarly, reporting to the trustee (i.e. the bank) about the child’s immediate and future financial needs. 

In this way, the parent establishing the trust may obtain the best of both worlds: by placing the fiduciary responsibility of investing the trust assets with a qualified institution, and leaving the “personal touch” responsibilities to someone who might have actively participated in the child’s upbringing. If properly drafted, this becomes a win-win for the child. The parent might even authorize the trust advisor to be compensated. 

Trust advisors are useful in other settings. A trust might authorize a trust advisor to amend the trust if a legal foundation upon which it was established subsequently changes. This is useful in the context of Medicaid planning, and can afford flexibility to amend the trust to conform with future legislative changes to eligibility. Or, a trust advisor might be authorized to construe trust language or even arbitrate disputes between trustees and beneficiaries. Or, a trust advisor might be authorized to remove and replace the trustee.

There are no free lunches, however, and trust advisors/protectors are not wholly unaccountable for their actions. In fact, unless the trust document provides otherwise, Ohio law presumes that third parties directing trust activity shall be held to a fiduciary standard, and that failing to meet that standard might result in the advisor/protector being liable for his/her trust-related actions. 

Considerable care should be given in enumerating responsibilities between the trustee and trust advisor. Ideally, both individuals would have an opportunity to discuss those roles prior to implementing the trust so that there is little delay or confusion upon those roles being formally assumed. Until then, carefully plan which individuals would best serve on a trust team and what responsibilities each member holds.

Copyright 2024 The Business Journal, Youngstown, Ohio.