Trustee Knowledge Series: Advanced Paper Six: Overview of protectors 'ad serviendum ac protegendum”

Protectors are common in trusts, particularly offshore trusts with professional trustees, where settlors want to ensure there is someone who can provide checks and balances on the often wide-ranging powers of trustees.

ROLE OF A PROTECToR

Unlike trustees, protectors are not the legal owners of trust assets. Rather, protectors in respect of the trust have negative (consensual) powers, in accordance with article 24(3) of the Trusts (Jersey) Law 1984 (as amended) (Law), and/or positive powers in accordance with article 9A of the Law. The positive power, for example, to appoint and/or remove trustees or the consensual/negative power to consent/veto the exercise by a trustee of its powers will not mean the protector is a trustee. The protector’s role, which depends upon the drafting of the trust instrument, is in essence to monitor actions of a trustee and check appropriate action is taken to protect the trust assets and this will involve the protector being entitled to trust information.

The role of the protector is important in the dialogue between the “parties” to a trust. A trusted and reliable protector may have an important role in guiding the trustees as to how the settlor would have liked to have seen trust assets dealt with in any particular circumstance. Whilst not always the case, many structures work very well where a trusted and long-standing family friend is appointed protector in a “paternal” role to ensure some continuity in the structure with which, unlike the institutional trustee, the person is familiar. This Protector may, depending on the trust, benefit from being joined by a professional protector (see Committees below).

However the role of a protector may also occupy a fiduciary position with associated duties (i.e. does the protector have a duty to act in the best interests of the beneficiaries?). We look at whether protectors occupy a fiduciary or personal position.

CHOOSING PROTECTORS

What should settlors (or their advisers) consider when appointing a protector?
As alluded to above, the most important issue for a settlor is the identity of any potential protector.

• Protectors typically have a very large degree of influence over structures and as a result great care must be exercised in their selection. If there is no clear candidate or need, the office is probably best avoided altogether.
• Settlors must also consider the tax profile of any potential protectors (depending on the jurisdictions involved and the amount of powers the trust instrument will confer on them) to avoid any potential argument that the protector’s residence may affect the trust for tax purposes.
• Further consideration is needed as to the whether the protector needs to be reported as part of the Common Reporting Standard and/or feature on an EU trust register. Individuals, like a family friend, may be less willing to act as a protector if their personal information is subject to reporting requirements and/or will feature on an EU register of trusts (public or private).

There are no legal restrictions governing who may act as a trust protector (other than ensuring the person(s) are of age, sound mind etc.), although, as mentioned above, it is usual for it to be either a professional adviser and/or close confidant of the settlor who understands the family circumstances and personalities as well as the settlor’s reasoning for setting up the trust.

There is no restriction preventing the settlor or even a beneficiary of the trust from acting as the protector. However, the possible disadvantage of a settlor-protector or beneficiary-protector is that they may struggle to be seen to exercise their powers in a fair and unbiased manner. It would be nonsensical for a trustee to also be a protector and so trust instruments should expressly state that a trustee cannot be a protector and vice versa.

Protector committees are increasingly popular with more bespoke trusts where it is considered that the trust requires a range of persons of varying skill sets, experience and knowledge to “watch over” the trust and provide for a more balanced decision making process.

APPOINTMENT AND REMOVAL OF PROTECTORS

A protector will usually be appointed in the trust instrument; either by name or by stipulating the process to be followed in choosing a protector. If a protector is not appointed at the outset, the settlor will usually have the power to appoint a protector at some time during the trust’s existence. If a protector is named in the trust instrument, or otherwise appointed to office, often the power of appointing a successor protector is vested in the existing protector. It was confirmed In the Representation of Jasmine Trustees Limited [2015] JRC 196 that a person with a power to appoint new trustees or a protector is exercising a fiduciary power and is under a duty:

• to act in good faith and in the interests of the beneficiaries as a whole;
• to act reasonably;
• to take into account relevant matters and only those matters; and
• not to act for an ulterior purpose. It is essential these duties are fulfilled as otherwise the appointment will likely be invalid.

The removal of protectors can be more difficult, particularly where the relationship between the protector and the beneficiaries has broken down and the protector opposes their removal from the trust. However, whilst removal of protectors was traditionally confined only to extreme cases (such as Mourant & Co Trustees Ltd v Magnus & Ors [2004] JRC 056, where the protector had been found guilty of embezzling from the trust and had since disappeared so that he could not be invited to step down as protector), more recent cases have widened the scope for removal of protectors. In the case of In the Matter of the A Trust [2012] JRC 169A, the court stated that the test for removal of a protector was the same for removal of trustees (held in Letterstedt v Broers (1884) 9 App Cas 371, that is, whether the continuance of the protector “would be detrimental to the execution of the trusts”).

PROTECTOR POWERS

Typical negative powers, or trustees’ powers subject to a protector’s consent, might be as follows:

• appointing capital to beneficiaries;
• adding or removing beneficiaries;
• changing the proper law;
• appointing an investment adviser; and
• varying or amending the trust.

Typical positive powers may include the power to:

• appoint and remove trustees; and
• appoint investment advisers/managers;
• appointment of successor protector(s).

FIDUCIARY VS NON- FIDUCIARY

The importance of this distinction is that fiduciary powers carry with them particular duties which the protector must follow when exercising the power. An example of these duties is to act in good faith in the interests of the beneficiaries as a whole. By contrast, non-fiduciary powers may be exercised however the protector sees fit, including selfishly for his own benefit (if so wished). Another distinction is that, where powers are of a fiduciary nature, courts have a greater power to remove protectors or declare their actions void.

There is Jersey case law stipulating that a protector with negative powers of consent occupies a fiduciary position in order that the court can police a protector’s activities to protect the interests of the beneficiaries (Sociedad Financiera Sofimeca v Kleinwort Benson (Jersey) Trustees Ltd [1992] JRC 125 and Mourant & Co Trustees Ltd v Magnus & Ors [2004] JRC 056). Therefore, prime facie, a relationship of complete confidence between the protector and the beneficiaries must exist although legally speaking the protector will owe a duty of care towards the beneficiaries. When a protector is exercising his negative powers, and providing consent to the trustee exercising its powers, he must consider whether the proposed exercise of the trustees’ powers is in the best interests of the beneficiaries. This will present the protector with a difficult task if the proposal is in favour of one beneficiary when many beneficiaries (including unborn or unascertained beneficiaries) are discretionary objects of the trust. It would stand to reason that a protector with positive powers also occupies a fiduciary position: it would be nonsensical to say that a protector with positive powers does not hold a fiduciary position when a trustee holding the same power would be in a fiduciary position. In the matter of the Bird Charitable Trust and The Bird Purpose Trust [2008] JRC013 the Royal Court of Jersey (Court) confirmed its supervisory jurisdiction over protectors and also considered whether a protector’s positive power to appoint successor protectors is a fiduciary power. Whilst the Court concluded that a protector having a positive power is a fiduciary, it also said that position was dependent upon construction of the trust’s terms.

Whilst ultimately the Court noted that such a question was one of construction of the particular trust document, the Court considered that it must consider the overall role of the protector and, if his role is fiduciary, it is more likely that the power is also fiduciary. In this instance, the Court noted:

• that there were a number of provisions of the trust document which supported the protector being a fiduciary; and
• if the protector did not exercise the power, then it fell to the trustees in whose hands it would be a fiduciary power. Therefore, the Court surmised it would be illogical for the power of appointment of new protector to be personal when made by a protector, yet fiduciary when made by trustees. Consequently, the Court found a protector having a positive power to be fiduciary, but such position was dependent upon construction of the trust’s terms.

In the Representation of Jasmine Trustees Limited [2015] JRC 196, the Court confirmed that a person (whether or not a protector) with a positive power to appoint new trustees or a protector is exercising a fiduciary power. A protector’s duty before exercising such a positive power would be similar to that of a trustee and include, for example:

• a duty to consider from time to time whether to exercise the power;
• a duty to make a proper survey of the objects of the power;
• a duty to consider the appropriateness of any exercise of the power; and
• not exercise his power for an improper purpose.

It seems that Jersey is moving ever closer towards a protector occupying a fiduciary position as a trustee does. Whilst there may be circumstances were a protector has powers which are not of a fiduciary nature, this will be dependent upon the construction of the trust document. Any person being appointed to the office of protector, having either positive or negative powers, needs to be fully aware and understand any associated fiduciary duties. Whilst typically a settlor, family friend or trusted advisor might assume the office of protector, such persons should not do so lightly; certainty a protector’s role is not to enforce the settlor’s wishes.

POTENTIAL PITFALLS

As with all trust documents, great care has to be exercised both when drafting the protector provisions in a trust instrument and when drafting supplemental instruments. Common traps for the unwary that are encountered
surprisingly frequently include:

• The most common pitfall; failure to procure protector consent where it is required for the exercise of a trustee power. Trust law is not favourable to such oversights and complicated legal issues inevitably arise, which in turn can lead to unwelcome remedial expenses and potential disputes.
• Issues with last minute adaptations of late drafts of trust instruments to provide for the appointment of a protector with no subsequent appointment being made. That power may be reserved to the settlor, for instance, who may die before getting around to exercising it. Alternatively the initial serving protector may die without making an appointment of his successor.
• Leading on from the above point, trust instruments do not necessarily provide drafting to cover what is to happen if there is no protector in office or where a protector has gone missing or refuses to exercise his/her powers. Effectively stagnation results if too many of the trustee’s powers have been made subject to protector consent or directions and the office has not been filled. Without an application to court, the trustee is effectively paralysed.
• Another possible issue with protectors is where they may misinterpret their own role in the administration of the trust as to enforce the settlor’s wishes to the letter (as in the case of In the Matter of the A Trust referred to above, where a trust protector interpreted his role principally as to ensure that the wishes of the settlor were carried out, rather than to uphold the interests of the beneficiaries. This eventually led to a complete breakdown of the relationship between the protector and the beneficiaries, and eventually led to litigation and the protector’s subsequent removal from office.

In summary, the inclusion of a protector is common in trusts. The role of the protector is to monitor the actions of a trustee and check that appropriate action is taken to protect the trust fund. Given the importance of this role, it is vital to ensure the correct person is appointed as protector, that such person understands their duties and role in the administration of the trust and that the protector’s provisions are carefully drafted.

For more specific advice on trusts in Jersey, we invite you to contact Giles Corbin or Nichola Aldridge.