Over Protective Protectors?

“All trustees are fiduciaries, but not all fiduciaries are trustees” was the excellent quote from Willoughby’s Misplaced Trust leading onto discussion over the role of a Protector and whether or not their role is indeed fiduciary in nature.

Malta Trusts

Before moving on to discuss this in more detail, it is worth exploring the concept and development of the Protector in modern Trusts. In my experience the use of Protectors in the past was very much a rarity but, over the last decade, many countries operating under civil law provisions have enacted Trust legislation (Hungary being a good example) and this role has spread in popularity. The reason for the rise of the Protector tends to be linked to Settlors unfamiliar with the concept of discretionary trusts, who are generally uncomfortable with the idea of handing over their assets to trustees in a jurisdiction they may never have visited or know little about.

The role of Protector, normally a trusted family advisor, to peek over the shoulder of the Trustee and perhaps having the ability via the Trust deed to exert certain powers, is very attractive to these Settlors. The powers reserved to the Protector can be as narrow or as wide as the Settlor desires but generally caution is advised in granting numerous powers to the Protector as there is a danger of wading into quasi-trustee territory – but that is a topic for another day.

A number of cases moving through the Courts over the last few years have specifically concerned Protectors and the contentious issue of whether protectors are fiduciaries. If this is the case then, as we already know, their powers must only be exercised in a proper way taking into account considerations relevant to the interests of the beneficiaries for whom the trust was established.

The pertinent point in this definition is “the interest of the beneficiaries” as unfortunately some Protectors assume their role (quite incorrectly) is to ensure the Settlors wishes are carried out despite the discretion of the Trustees.

As an example, in the recent Jersey case in the matter of A Trust it was clear the Protector was a little too overzealous and saw himself as the dogmatic guardian of the Settlor’s wishes.

The case hinged around two discretionary trusts with the same Protector. After the death of the Settlor, the relationship between the Beneficiaries and the Protector appeared to have broken down irretrievably and the “overwhelming majority” of the Beneficiaries wished to see him removed form his role.

It appears the Protector misunderstood his role, insisting the Trustees rigidly adhere to the Settlors wishes (as he interpreted them) rather than giving consideration to what may be in the best interests of the Beneficiaries.

The Royal Court took a dim view and suspended the Protector’s powers and removed him from office. Further to this, the Court commented that a Protector’s role is “no higher” than to see the Trustees have “due regard” to the Trustees’ wishes. His misunderstanding had “potentially jeopardised the trusts by his own overzealous involvement”.

It is important,therefore, that Settlors, Protectors, and (to some extent) Beneficiaries understand the role a Protector plays. As much as Trustees owe their duties to the Beneficiaries, a Protector cannot consider himself a pseudo-Settlor, and must accept the fiduciary nature of his role to consider what is in the best interests of the Beneficiaries even if this conflicts with the Settlor’s wishes.

This is an important development, consistent with other recent cases where the courts hold Protectors as fiduciaries, and food for thought when Settlors have appointed a Protector purely to find a way of influencing the administration of the Trust.

So, if we have established that a Protector is a fiduciary, who is an appropriate person to take on this role? The answer (unless of course closely defined in the trust deed) is that anyone can take on this role, but caution should be exercised by the Settlor in their choice to ensure the proposed Protector sufficiently understands the concept of a discretionary trust and how they function- particularly the importance of not fettering the discretion of the Trustees. The more knowledge they have in this area, the more likely the relationship between all parties to the trust will work effectively and reduce the possibility of expensive and time consuming litigation, which generally will be at the expense of the Trust fund itself.

Sarah Ingrassia | FinanceMalta | Trusts 

Sarah Ingrassia
Associate Director, Boston Multi Family Office
www.bostonmfo.com