Protector (trust)
Encyclopedia
In trust law
, a protector is a person appointed under the trust instrument
to direct or restrain the trustee
s in relation to their administration of the trust
.
Historically, the concept of a protector developed in offshore jurisdictions
where settlors were (perhaps understandably) concerned about appointing a trust company
in a small, distant country as sole trustee of an offshore trust
which is to hold a great deal of the settlor's wealth. However, protectors now form a part of mainstream tax planning in most jurisdictions which recognise trusts.
There are a number of reasons that a settlor may wish to appoint a protector in relation to a trust:
The powers vested in the protector vary both according to the proper law of the trust and the terms of the trust instrument. The powers may include:
Conceptually many commentators have difficulty with the idea of a protector, as this undermines the role which in law has historically been fulfilled by the trustees. As protectors are a relatively recent innovation in trust law, case law
is scant. Is it not even clear if as a matter a law a protector would owe fiduciary duties to the beneficiaries
(although in practice, many trust instruments expressly state that they shall).
It is sometimes suggested that where the protector is too close to the beneficial interest in the trust (for example, if the protectors have power to confer benefits upon themselves, directly or indirectly) this may destroy the essential nature of the trust. If the protector has power to grant beneficial interests in the trust fund to the settlor
, this may have disastrous tax consequences in some jurisdictions.
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
, a protector is a person appointed under the trust instrument
Trust instrument
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
to direct or restrain the trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
s in relation to their administration of the trust
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
.
Historically, the concept of a protector developed in offshore jurisdictions
Offshore financial centre
An offshore financial centre , though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds....
where settlors were (perhaps understandably) concerned about appointing a trust company
Trust company
A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
in a small, distant country as sole trustee of an offshore trust
Offshore trust
An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction.Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring assets on the trustees to manage for the benefit of a person or...
which is to hold a great deal of the settlor's wealth. However, protectors now form a part of mainstream tax planning in most jurisdictions which recognise trusts.
There are a number of reasons that a settlor may wish to appoint a protector in relation to a trust:
- protectors allow a great degree of flexibility when dealing with changes in circumstances, including both factual circumstances (death, premature divorce, previously unknown children) and legal changes (any legal changes, but most frequently changes to applicable revenue laws);
- the settlor may be concerned that the trustee may not pay sufficient attention to his wishes;
- the settlor wishes certain powers to be withheld from the trustees; or
- the settlor wishes a third party to act as a main point of contact, between the beneficiaries and the trustees.
The powers vested in the protector vary both according to the proper law of the trust and the terms of the trust instrument. The powers may include:
- power to remove and appoint trustees;
- power to approve a change of proper law;
- power to approve the addition or removal of beneficiaries;
- power to approve proposed trust distributions;
- power to approve the appointment of an agent or adviser either generally or in relation to specific matters;
- power to approve investment recommendations;
- power to appoint replacement protectors; and
- power to terminate the trust or approve the termination of the trust.
Conceptually many commentators have difficulty with the idea of a protector, as this undermines the role which in law has historically been fulfilled by the trustees. As protectors are a relatively recent innovation in trust law, case law
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
is scant. Is it not even clear if as a matter a law a protector would owe fiduciary duties to the beneficiaries
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
(although in practice, many trust instruments expressly state that they shall).
It is sometimes suggested that where the protector is too close to the beneficial interest in the trust (for example, if the protectors have power to confer benefits upon themselves, directly or indirectly) this may destroy the essential nature of the trust. If the protector has power to grant beneficial interests in the trust fund to the settlor
Settlor
In law a settlor is a person who settles property on trust law for the benefit of beneficiaries. In some legal systems, a settlor is also referred to as a trustor, or occasionally, a grantor or donor. Where the trust is a testamentary trust, the settlor is usually referred to as the testator...
, this may have disastrous tax consequences in some jurisdictions.