Protectors - a settlor's friend - and a trustee's too?

The offshore industry has done much to promote protectorship as a concept and as a valuable adjunct to a fiduciary relationship.

Technical briefing

This reflects a move away from the time when many trusts were hastily established, often because of apprehended tax changes, without the settlor meeting his trustee. The trustee would generally be appointed on the recommendation of professional advisers who might incorporate a protector to provide a level of security to the settlor, at least prior to the time when a close relationship could be established with the trustees. There are many reasons why a protector might be considered appropriate and this short article summarises the role of the protector, considers some practical issues arising in relation to protectorship and looks at the potential for using the protectorship concept.

What is a protector?

In broad terms, a protector will be appointed to protect the respective interests of the settlor and/or the beneficiaries. In certain instances he may have wider powers vested in him as part of this function, but he will traditionally need to consent to key trustee decisions, such as the appointment or exclusion of beneficiaries from the beneficial class, the appointment of capital and perhaps also the change of proper law. He would usually have the positive power to hire and fire trustees.

A protector can have a valuable wider role in a governance context, providing for appropriate checks and balances in a family structure, particularly a complex one or where there is a family business. He or she can provide an element of security and reassurance, act as a sounding board for the family or for the trustees on strategic issues and can be a point of contact for beneficiaries.

Who can be a protector?

As long as the individual is adult, of sane mind and has or can acquire an understanding of the settlor's wishes and the family dynamic, there is no reason why anyone should not be a protector. There are certain other issues which might impact on the appropriateness of choice, including, for example, the residence of the protector where it may not be advisable to have a protector and settlor resident in the same jurisdiction for tax reasons. In certain circumstances the protector may be a corporate entity and professional protectors can bring special advantages.

Who cannot be a protector?

Apart from those exclusions referred to in the preceding paragraph it is generally not advisable to appoint:

  • A protector from the beneficial class unless the powers vested in him do not give rise to any potential or actual conflict. A protector required to give consent to any distributions is going to struggle to persuade other members of the beneficial class as to his objectivity if he is also a beneficiary.
  • Whilst close friends are often chosen and frequently of considerable assistance to the trustees with their intimate knowledge of the settlor and family, care must be taken to ensure that such a protector is not predisposed to favour one beneficiary over another.
  • It was not uncommon for a trust company to appoint an in-house individual (often also a board member of the trust company) as protector. Whilst there is nothing to suggest that this arrangement could not work, perception will always militate against the presumption in practice, and combined with commercial and possibly other pressures this does not generally make for a happy mix.
  • On a purely practical level it is always advisable to appoint someone who is willing to be appointed, resides in a broadly similar time zone, speaks the same language and is willing and able to understand the responsibilities of his role.

Why have a protector?

At one end of the spectrum, the protector's role is limited and often viewed with scepticism by trustees and by their advisers, potentially involving uncertainty or hampering administration through having to delay decisions whilst awaiting a protector's consent.

A good protector can however provide not only the settlor but also the trustee with a considerable degree of comfort, particularly as relationships are established and cemented between the trustees and the settlor and his family. Many of the above comments have assumed relatively straightforward structures, however arguably protectors really come into their own in the following circumstances:

  • Very complex family structures where, for example, there have been multiple marriages and progeny combined with considerable wealth; and/or
  • Very complex structures involving, for example, numerous trusts and companies or other entities/interests; and/or
  • A desire to involve the protector in a wider capacity, for example in relation to some of the investment functions.

In these circumstances, consideration might be given to appointing a corporate protector where the board could comprise a number of individuals whose particular skill sets will help to ensure the smooth running of the trust by personnel, all of who bring something to the relationship, ensuring that the trusteeship runs smoothly with the trust fund invested and utilised to the maximum benefit of the beneficial class.

Benefits of professional protectors

There can be significant advantages for professional trustees in working with specialist professional protectors, enforcers and guardians who have special skills in fiduciary matters or the tax aspects thereof, or indeed in the underlying business activity in which the settlor and/or trustees are engaged.

A specialist protector can of course retain the power of appointing and removing trustees and can continue to have veto or consent powers over key strategic issues. They also however provide significant comfort for settlors and beneficiaries in providing a mechanism for succession and overview.

This is particularly useful in the context of will trusts, trusts or foundations set up to span generations or in the circumstances previously listed. The trust will be large, complex and multi-generational. There is then an overwhelming need for a system of checks and balances and on-going review in case the original trustee, however competent and trusted, retires or if a corporate is bought or dissolved.

It is in the area of strategic governance that there is the primary need for suitably qualified fiduciary protectors, enforcers of purpose trusts and guardians of foundations, but this does not necessarily involve a major international multi-generation trust.

Even in a smaller, less complex arrangement a professional protector may act as such alongside the trusted family adviser who may lack specialist fiduciary expertise (and who accordingly may not be an ideal protector, or who may simply not want that responsibility) but whose overview of family or commercial matters is still valued and who can act as a quasi-protector alongside the formally appointed one.

A professional protector might be particularly valuable where relations break down between families, such as where there is a court-appointed trusteeship or in the context of a divorce and a fight over trust assets or in the commercial context where the trusteeship is effectively an escrow arrangement.

There may also be a role for a professional protector in reinforcing a trust's standing against claims of sham or against Revenue attack, arguing that the settlor has, for example, retained control or retained valuable economic rights. If the protector is patently not a stooge of the trustees, nor of the settlor, but an independent professional, whether individual or corporate, it should be harder for such allegations to succeed.

Trustees might also welcome the reassurance given to settlors of offering a balance of powers and the security it provides through fostering better relations with settlors or founders.

What is the cost?

There are likely to be cost implications in appointing a protector and in particular, a protectorship committee where almost certainly the members of a protectorship committee will expect to be compensated in some way. Whether or to what extent they should be paid will be a matter for independent consideration in each case, but this will generally mean that the concept of a protectorship committee is likely to be of more appeal in cases where there are significant and/or complex trust funds.

Is this a fiduciary relationship?

Whether or not a protectorship role is fiduciary will depend on the terms of the trust deed and the nature and extent of the protector's role. In some cases the protector will not assume fiduciary responsibilities, but if his role is proactive rather than simply one of giving consent, failure to carry out his role appropriately may amount to a breach of fiduciary duty.

If a protector simply fails to exercise his powers or does not fulfil his duties, it could hinder the administration and the trusteeship. Such issues can be addressed in part by the express provisions of the trust deed. Ultimately, however, if the trustee's role were so hindered by a protector's failure to act, the trustees would have to consider whether this failure justified an application to court to remove the protector or to proceed without consent.

Summary

The role of protectorship can be a complex one but where settlors, most customarily masters of their own wealth and frequently entrepreneurial in nature, are minded to establish a trust, they often want the security of knowing that they have a well informed ally and sometimes one who can make a positive contribution to the settlor/trustee relationship. From a trustee's perspective the constructive potential of a protector's involvement should never be underestimated and may indeed do much to cement and enhance what can be a challenging and complex set of relationships.

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