This is the eighth and final article in a series about leaving family wealth to the next generation(s). The other Articles are entitled:
- Why you should make a Will?
- Why create a trust?
- Types of trust and who’s involved
- One trust or two?
- Trusts and passing on the family business
- Powers of Attorney and Family Wealth
- Trusts and Forced Heirship
When a trust is first established the first trustee(s) (known as the “original trustee(s)”) is usually someone that is known to and in whom the settlor “trusts”, i.e. is able to rely upon and has the integrity, strength, ability and surety, to look after the funds vested into the trust for the benefit of the trust’s beneficiaries.
As time progresses the relationship between a settlor and “his or her” trustee(s) and similarly with a beneficiary(s) and a trustee(s) usually deepens, but on occasion (usually following the appointment of an alternate trustee(s)) it becomes fraught and at such times having a protector(s) of the family trust, with suitable expertise and powers, can be extremely useful.
Personally I am a supporter of having a protector and where I have been involved in administering a trust which does not provide for the appointment of a protector, one of the first steps I take as trustee is to vary a trust deed to allow for the appointment of a protector(s) should one ever be required. Of the trusts I am currently involved with less than half have a protector appointed even though the provisions to have one are there.
So what is a protector?
A protector, who may be an individual or a company, is a person who has some control or influence over the trustee(s) and/or the trust. The powers and responsibilities of a protector are set out in the trust deed and it is usual, if the protector has no other power, for a protector to be able to remove a trustee as well as to appoint additional or replacement trustees.
The trust deed may also provide that the protector has some degree of control over whom the trustee may use as investment adviser to the trust, or who may become a beneficiary of a trust from the family of a settlor after a given event, e.g. such as on the death of the settlor or any principal beneficiary.
A protector will usually seek to ensure that:
- The trustee:
- administers the trust in accordance with the provisions of the trust deed;
- makes a suitable account to the beneficiaries of the trust’s income and expenditure and investments; and
- has due regard to the contents of any Letter or Memorandum of Wishes executed by the Settlor(s) of the trust.
- He/she acts as an independent intermediary between the trustee and any of the beneficiaries to resolve any misunderstanding and disputes. If the actions of a trustee are found wanting, then a protector may well seek to appoint an additional or replacement trustee;
- He/she maintains his independence to avoid any conflict of interest issues; and
- He/she does not breach any fiduciary duties as set out in the trust deed or otherwise.
Who is typically appointed a protector?
A protector, as with a trustee, is usually someone the settlor(s) trusts and where the settlor(s) and/or his spouse are not the protectors during their lifetime, protectors tend to be:
- A family friend;
- A relative;
- An accountant; or
- An advocate,
although at times a company (more commonly now a licensed trust and corporate service provider) may act as a protector.
If a trust deed provides for more than one protector to be appointed, which is not unusual, the trust deed will usually provide that the protectors must act in unison, i.e. together, which is the case where there is more than one trustee.
I have been involved with trusts for most of my professional career and having worked with lay and professional people who have fulfilled a protector role, I must admit that I prefer a professional to act as a protector of a trust and this is because, inter alia:
- They tend to have already some knowledge of the role of a protector and indeed may have acted in the capacity previously;
- They are better in understanding the complex issues which may arise between a trustee(s) and a beneficiary(s);
- I believe they are better placed to represent and safeguard the interests of a beneficiary; and
- They are generally more capable when it comes to holding an errant trustee to account.
What are the typical powers given to a protector?
The powers provided to a protector in a trust deed are fiduciary in nature and vary. They may be:
- Negative such as where the protector’s consent is required before a trustee can carry out certain transactions, e.g. making investments; or
- Positive overriding powers enabling the protector to direct the trustee(s) in certain matters or to appoint or remove trustees.
Some examples of the powers expressly given to a protector are powers to:
- Monitor and agree the trustee’s fees;
- Require an accounting or audit of the trust or any underlying company and to nominate any auditor;
- Be consulted or have the power to veto any decision of the trustees to make any discretionary payments to beneficiaries;
- Withhold the consent to a trustee(s) proposed exercise of a power to amend the administrative or other managerial terms of the trust;
- Be consulted or have the power to veto sales of particular shareholdings or other trust property;
- Add or remove someone from benefitting from the trust;
- Amend any clause in the trust deed; and
- Transfer the administration of the trust to another jurisdiction.
As a protector merely has powers vested in him/her and not trust property he/she or it is not a trustee.
Whilst a protector may not be a trustee, the more powers vested in a protector, the more a protector becomes akin to a trustee.
Sometimes a protector may be regarded as a Trustee De Son Tort [of his own wrong] which is where a person is not a regularly appointed trustee but because of interference with the trust can be held by a court as a constructive trustee which results in the protector being personally liable for losses to the trust.
Remuneration of a protector
As with a trustee, a professional person who acts as a protector tends to be paid for any services they perform and in addition they are usually able to seek legal opinion on matters affecting the trust or their relationship with the trust providing their actions are not as a result of, for instance, any intentional wrong doing.
Are protectors ever held to account?
A protector acting in breach of his/her fiduciary duties is usually held accountable by way of an application to the Court by a beneficiary(s) and/or the trustee(s); such action being usually brought on account of a breach of fiduciary duties and/or conflict of interest.
If you would like to know more about the points raised in this Article then please contact me or one of my colleagues at:
UHY Crossleys LLC
Telephone: +44 1624 822816
A member of UHY International, a network of independent accounting and consulting firms.
Article by Nigel Rotheroe
I am a qualified accountant working in public practice and a director of a number of licensed trust and corporate service provider companies. I am actively involved in wealth management and preservation structures for clients in the Isle of Man, where I live and further afield and this often entails working with clients and/or professional firms overseas. My work varies day to day and ranges from giving bespoke tax and structure advice, undertaking special projects, and addressing the multitude of issues that trust and corporate administration work brings. Life is never dull!