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TRUSTS - ROLE AND RESPONSIBILITY OF PROTECTORS

Keith H Turberville

To Protect or Not to Protect
 
Whilst the role of a trust protector is more often raised in connection with offshore trusts, he/she may be appointed in domestic trusts both inter vivos and will trusts. His/her role and responsibility are often misunderstood or unclear.
 
A trust protector has nothing to do with nor has any connection with the “Public protector”, set up in terms of South Africa’s Constitution to investigate complaints against government agencies or officials.
 
What is a Protector?
Historically, the concept of a protector developed in offshore jurisdictions. 
Settlors were concerned about transferring their wealth, often a great deal, to a trust company on a small island somewhere, as sole trustee of an offshore trust. The office of a protector has no statutory background and his/her role and responsibility, including the powers given to him/her, therefore are set out in the trust deed.
 
Why Does a Settlor Require a Protector?
To answer this question, we have to look at why the settlor has created a trust in the first place.  There are many reasons, including:

  1. To protect his/her family

  2. To mitigate taxation

  3. Asset/creditor protection

 
If the settlor could find some other way that avoids having to part with his/her assets, he/she would undoubtedly do so.  When this is not possible, then the trustee is looking for some means of trying to retain some degree of control over the trust property and the appointment of a protector is seen as a solution by many.
 
Who Does the Protector Protect?
The appointment of a protector has been made by the settlor who may well view the protector as the ultimate control mechanism from beyond incapacity and the grave. In reality, in most cases, protectors’ powers are fiduciary and therefore carry obligations to the beneficiaries of the trust, not to the settlor.
 
Who to Appoint as Protector?
Not surprisingly, many settlors will ask to be appointed as the protectors of their trusts and whilst this may not be unacceptable, depending on the roles and responsibility of the protector, there are numerous reasons why this may be disadvantageous:

  1. Settlors are not immortal

  2. Powers reserved to the protector may be exercisable by trustees in bankruptcy

  3. Succession issues

  4. Interference of protector during settlor’s lifetime

 
In light of the above many settlors will look to a trusted family friend to take on the role. Whilst a friend is independent, the settlor would hope that the protector so appointed will act as the settlor would have done. Such a protector is also not immortal and over time, may lose contact or interest in the family and the trust or in a worse case he/she may fall out with the settlor.
 
As a result of these perceived issues with a family friend, settlors may look to appoint one of their professional advisors as a protector who will deal with the succession issue in that once the person appointed retires, his/her successor in the organisation will replace him/her. In this way the protector is truly independent and will not be a beneficiary of the trust.
 
Protector’s Powers
The protector’s power is the key question and will depend on the terms of the trust deed.  It may range from very limited where the protector is simply notified of decisions made by the trustees.  The protector would have no right to veto the trustees’ decision.  Alternatively, the much more hands on approach may be required where the protector’s consent is required for almost all actions of the trustee. Caution must be exercised when considering the powers to be given to or reserved for the protector.
 
If too many powers are given to a protector so that the trustees are unable to take action without the protector’s consent, there is the risk that it could be argued that the trustee is no more than a custodian and the protector deemed to be the trustee.
 
This could give rise to some very unfortunate and potentially expensive consequences, particularly in relation to taxation, depending on where the protector is resident for tax purposes.
The following are some of the roles that the protector may undertake:

  1. Consent to the investment of the trust funds including the appointment of investment advisors

  2. To monitor compliance with the settlor’s wishes

  3. To review the trust accounts

  4. To approve the trustee’s remuneration

  5. Power to remove and appoint trustees

  6. To monitor the forum for the administration of the trust

  7. To add, remove or exclude beneficiaries

  8. Power to terminate the trust

 
This list is not meant to be exhaustive. Not all of the above may be used in every trust but the list comprises the roles most commonly found in trust deeds. The powers finally decided on will be determined by the settlor and his/her legal and tax advisors.
 
Duties and Obligations of the Protector
Whilst the powers of protectors may be bare power, in almost all cases they will be fiduciary in nature.  This means they should be exercised in the interests of the person or persons on whose behalf they are to be exercised, normally the beneficiary of the trust. In exercising a power, the protector must consider whether or not to exercise the power, having looked at the interests of all relevant parties even if in exercising the power only one of the beneficiaries receives a benefit.
 
The powers and duties of the protector are very important and must be exercised honestly and in the interests of the objects of the power exercising his/her skill and expertise in reaching a decision.

It should be mentioned that where the protector is a professional protector or professional person acting as protector, there is a higher duty of care expected than for a lay person acting in the same role.
 
The duties of a protector, whether lay or professional, comprise the following:

  1. A duty of care to consider whether or not to exercise a power

  2. A duty not to fetter his/her discretion

  3. A duty not to act under another’s discretion

  4. A duty not to delegate the exercise of his/her discretion

  5. A duty to treat the objects of a power fairly and where appropriately, equally

  6. A duty not to act for his/her own benefit

  7. A duty not to act unreasonably

 
In all cases when exercising a power, the protector must comply with the terms of the trust.
 
Conclusion
In many situations, the addition of a protector is helpful and useful in assisting the trustees, but their (the protectors’) powers are generally fiduciary.
 
If therefore the settlor appoints a protector believing him/her to be his/her alter ego who will continue to ensure that the assets are administered as the settlor would have wanted after the settlor’s death, then he/she has misunderstood his/her role.
 
The protector is not omnipotent and cannot necessarily act as the settlor wishes, disregarding the interests of the beneficiaries.  If he/she does so, the beneficiaries or other affected parties may well turn to the courts for redress.