With the phenomenal growth of offshore trusts a new role has evolved - that of Trust Protector. But what is a protector and does every trust need one? These are questions which are asked by many clients who are contemplating the establishment of an offshore trust.
The role of protector is a concept not found in traditional trust law. The position arises from a desire of the person establishing the trust (the settlor) to appoint an independent person to oversee the actions of the trustee. An individual who is a trusted friend of the settlor or perhaps a professional adviser who knows the family well will often be chosen.
The powers of a protector will be detailed in the trust deed. These will vary from trust to trust but in their simplest form the protector will have the power to remove the current trustee and appoint a new trustee. In some trust deeds the protector is given more complex powers which involve them in the day to day administration of the trust such as consenting to investment transactions or to distributions to beneficiaries.
When drafting a trust deed it is important to consider what role the protector will play in the trust. It may be attractive to a settlor who is unfamiliar with the trustee to make all the powers of the trustee subject to the consent of the protector. However, this can make the trust impractical to administer especially if the protector is located in a different jurisdiction to the trustee.
A further consideration is that if the protector has too much control over the trust he may be considered as being a trustee. This could have both legal and taxation ramifications depending on the residence of the protector.
There is nothing to stop the settlor of a trust being the protector. However, care must be taken to ensure that the powers of the protector are limited otherwise it may be said that the settlor has not relinquished control of the assets and that the trust is a sham.
In recent years a small number of cases have been heard by the courts in offshore jurisdictions which have looked at the role of protectors. These cases have highlighted that some powers given to a protector are fiduciary in nature . Therefore a protector will have a legal obligation to exercise the powers in a manner which is in the best interests of the beneficiaries as opposed to the settlor.
The inclusion of a protector within a trust will be welcomed by most trustees as they will find it helpful to discuss the administration of the trust with someone who is not beneficially interested in the trust but who is close to the beneficiaries. This will be particularly helpful following the death or incapacity of the settlor.
Protectors have a very valuable role to play in the successful administration of a trust. However, as with selecting a trustee, great care must be taken in the appointment of a protector. Whilst a trustee can be replaced this is seldom the case with a protector.
This article provides a general outline on the subject at the time of writing (August 1996). It is not intended to be exhaustive nor to provide legal advice in relation to any particular situation and should not be acted on or relied upon without taking specific advice.