TRUST PROTECTOR

Published date01 December 2008
Date01 December 2008

In recent years, the concept of trust protector has enjoyed phenomenal success in the offshore jurisdictions. This article analyses the different conceptions of the office of trust protector from the perspectives of different jurisdictions, before delving into the nature and extent of the duties owed by trust protector, and the extent of the courts’ control over trust protector. This article also touches upon the serious concerns about the use of trust protector, explores its operation and relationship with the traditional parties in a trust, before arguing for a cautious approach towards admitting the concept of trust protector into onshore jurisdictions via statutory means.

I. Trust protector — Its function and attractions

1 The concept of trust protector1 has enjoyed phenomenal success in the offshore jurisdictions.2 Not too long ago, there had been no granting of such powers of beneficiary appointment or administrative powers upon non-trustees, to anywhere near the extent currently employed in offshore trusts.3

2 The office of trust protector4 was first developed5 to enable settlors of offshore asset protection trusts to maximise their control over assets transferred to trusts, while still immunising them from the reach of creditors. But today it is no longer confined to the asset protection context.6

3 Increasingly, estate planners are using the office of trust protector as an important device that not only adds critical flexibility to long-term trusts, but also increases the settlor’s ability to control the trustees’ behaviour long after the settlor has passed away or has become incapable of directing the trustees.7 There are an increasing number of cases in which supernumerary powers8 are not merely add-on features to make a structure more secure and satisfactory. Instead, they constitute a critical mechanism that a settlor aims to have for a trust.9

4 Since the early days in the development of supernumerary powers, there has been greater involvement of outsiders and much more varied and extensive use of powers with regard to investment and management. This is not simply a case of devising more efficient and reliable management arrangements. Instead, it is due to the fact that attitudes to the disposition of wealth, and the resultant use of trusts for that purpose, have been changing.10

5 Many have considered the office of trust protector to be an essential component of the operation of offshore trusts, one that provides the settlor and the beneficiaries a level of protection which was previously absent. The protector’s ability to check the powers of trustees without compromising the tax status of the offshore trust — one of the main reasons why offshore trusts are set up in the first place — makes it even more appealing to settlors in offshore trusts.

6 The development of supernumerary powers — such as that of trust protector in offshore jurisdictions — has often been attributed to a lack of confidence in a distant trust company, or a distant jurisdiction. This is an oversimplification. The difference — between the levels of confidence reposed in an offshore unit of a major international bank and that in an onshore unit of the same bank — is negligible at best.

7 The development of the office of trust protector can be seen as a response to the difficulties and worries faced by settlors of offshore trusts. There are the obvious difficulties and problems in following the traditional English practice of adding trustees in the circumstances of many offshore trusts.

8 For the dual reasons of tax and confidentiality, the settlor would want to alienate ownership and control of part or all of his estate immediately so as to ensure that he has no interest under the settlement.11 However, at the same time, the settlor also wants to make his estate available for other members of his family or other nominated beneficiaries over what might be a substantial period.

9 Adding on to this original concern is the fact that trust agreements often deliberately grant trustees a wide range of powers with regard to the trust funds so as to enable the trustees to be responsive to any unforeseen circumstances.12 The result is that the settlor ends up having to deal with a situation where the trustees are either geographically distant or possibly unknown. On the ground, settlors of offshore trusts by and large are from jurisdictions that are neither familiar nor comfortable with the idea of handing over complete or exclusive control to others.13

10 The settlor may be cut off from his original estate, and left with no say in either the conduct of the trustees or the distribution of the trust assets. The use of a letter of wishes to hopefully influence the conduct of the trustees is of no help to the settlor as it is not legally binding, negating its ability to proffer a solution to the problem faced by the settlor.14

11 Trust protectors are rarely found in onshore trusts as settlors are usually able to retain a comfortable level of control over the exercise of the trustees’ powers. This can be done either by the settlor acting as a trustee himself or getting a family member or close relative to do so.15 This solution is mostly unavailable to settlors in the case of offshore trusts, which are generally established owing to the tax advantages associated with them.

12 The nature of property settled on offshore trusts may also partially explain the enthusiasm for supernumerary powers, especially the inclusion of assets requiring active management. The placing of management control in family hands, or mixed family/outsider hands, on a suitable basis is, in some cases, the settlor’s primary objective.16 The appointment of a protector gives that extra layer of security to the settlor, to ensure that even after his death the trust will be administered in accordance with his wishes.17

13 A trust protector may be authorised to edit or veto information that trustees propose to release. Professional trustees also welcome the protector as one who assumes some of the decision-making duties, relieving part of the trustees’ burdens by, for example, interpreting the settlor’s letter of wishes on the trustee’s behalf and nominating among the beneficiaries those who should receive loans or advancements.18

14 Thus protectors in offshore trusts are commonly appointed to provide a level of comfort19 to settlors who may not be familiar with the appointed trustees or the jurisdictions in which they are resident. Trust protectors give settlors either the critical control or at least a comfortable level of influence over trustee activity.20

II. Trust protector — Different conceptions
A. The offshore perspectives

15 As its advantages became more apparent, the use of protectors became more prevalent. This in turn led to the exercise of codification in a number of offshore jurisdictions. The Cook Islands International Trusts Amendment Act of 1989 represented the first step towards statutory recognition. The Amendment Act has since been incorporated into the International Trusts Act 1984.21“Protector” is defined in s 2:22

‘Protector’ in relation to an international trust means a person who is the holder of a power which when invoked is capable of directing a trustee in matters relating to the trust and in respect of which matters the trustee has a discretion and includes a person who is the holder of a power of appointment or dismissal of trustees.

16 This definition appears to be deliberately restrictive. Presumably a consent power would not qualify. Neither would a power to add or remove beneficiaries in a discretionary trust.23 The phrase “and in respect of which matters the trustee has a discretion” is also perplexing. On the face of the provision, the trustee has no discretion if it is obliged to

comply with the directions of the protector. The definition also draws attention to the notion of power which clearly identifies the legal position of the trust protector. From this viewpoint, the trust instrument may provide for “the office of the trust protector”. The Cook Islands legislation represents the customary view of the protector.24 It is also present via implication in earlier laws25 that were drafted before the office of the trust protector became the huge phenomenon that it is today.26

17 Other offshore jurisdictions soon followed the lead of the Cook Islands. In Belize,27 Anguilla28 and Nevis29, the legislation state that the person appointed to the office of protector shall have certain powers, including the power to remove a trustee, to appoint new or additional trustees and the power to change the proper law of trust. These are in addition to “such powers as are conferred by the terms of the trust” or the provisions of the respective Acts.

18 Among the offshore legislation, the Belize legislation represents the most comprehensive effort. Section 16 deals with the protector’s obligations in the following terms:30

(4) In the exercise of his office, the protector shall not be accounted or regarded as a trustee.

(5) Subject to the terms of the trust, in the exercise of his office a protector shall owe a fiduciary duty to the beneficiaries of the trust or to the purpose for which the trust is created.

Subsection (4) appears to state the obvious. Subsection (5) appears to be entirely appropriate if it seeks to establish that it is the norm that a protector has a service obligation. Not only does s 58 of the Belize legislation31 establish that a protector has the necessary standing to enforce a trust, it also appears to say that the court may appoint a

protector, but not remove one. Presumably in so doing, the court may establish the powers, obligations and rights of the protector, though perhaps what the legislative draftsman had uppermost in mind was the appointment by the court of a person to fill a vacancy in a case where the trust instrument already established the office of protector...

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