A settlor’s friend, and a trustee’s too?

Wednesday, 01 May 2013
Julian Hayden and Michael Powell summarise the functions of protectors.

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

This reflects a move away from the time when many trusts were hastily established, often because of apprehended tax changes, without the settlor meeting the trustee. The trustee would generally be appointed on the recommendation of professional advisors, who might incorporate a protector to provide security to the settlor at least until a close relationship could be established with the trustees.

There are many reasons why a protector might be considered appropriate, and this article summarises the role of the protector, considers some practical issues 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 interests of the settlor and/or the beneficiaries. Sometimes they may have wider powers vested in them as part of this function, but they 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. They would usually have the positive power to hire and fire trustees.

Protectors 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. They can provide an element of security and reassurance, act as a sounding board for the family or for the trustees on strategic issues, and be a point of contact for beneficiaries.

Who can be a protector?

As long as the individual is adult, of full legal capacity 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. Certain other issues might influence the appropriateness of a choice, including the residence of the protector, as 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 mentioned above, consideration should be given to the following:

  • A protector from the beneficial class should generally not be appointed unless the powers vested in them 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 of their objectivity if they are also a beneficiary.
  • While 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 they are 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. While there is nothing to suggest that this arrangement could not work, in practice it should be avoided, as it could be seen as problematic, and, combined with commercial and possibly other pressures, this does not generally make for a happy mix.
  • On a 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 their 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 advisors, potentially involving uncertainty or hampering administration through having to delay decisions while awaiting a protector’s consent.

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

  • Complex family structures where, for example, there have been multiple marriages and progeny combined with considerable wealth.
  • Complex structures involving, for example, numerous trusts and companies or other entities/interests.
  • 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 individuals whose skills all bring something to the relationship, ensuring that the trusteeship runs smoothly, with the trust fund invested and used 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 their tax aspects, 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 to appoint and remove trustees, and can continue to have veto or consent powers over key strategic issues. They also, however, give settlors and beneficiaries a valuable 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 listed above. The trust will be large, complex and multi-generational. There is then an overwhelming need for a system of checks and balances and continuing review in case the original trustee, however competent and trusted, retires or if a corporate entity 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 alongside the trusted family advisor, 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.

Costs

There are likely to be cost implications in appointing a protector, and in particular a protectorship committee, whose members will almost certainly 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 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. If the deed is silent, it will depend on the nature and extent of the protector’s role. In some cases the protector will not assume fiduciary responsibilities, but if the role is proactive rather than simply one of giving consent, failure to carry out the role appropriately may amount to a breach of fiduciary duty.

If a protector simply fails to exercise their powers or does not fulfil their 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 complex, but where settlors, 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 do much to cement and enhance what can be a challenging and complex set of relationships.

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Julian Hayden and Michael Powell

Julian Hayden TEP and Michael Powell TEP are Directors at Hawksford International.

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