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Is there still a role for a Protector in trusts?

November 2007 - Finance. Legal Developments by Baker & Partners.

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Potential settlors who may be considering placing assets into a trust tend to be concerned to ensure that there is an appropriate control over the manner in which the trustee administers the trust – naturally the law and regulatory requirements provide some control, but where a settlor seeks to ensure that his individual concerns and wishes are reflected in the administration of a trust, trust law has developed the role of the Protector, which is, or at least has been, an important role.

A Protector is a person who is to be consulted before certain decisions are taken in relation to the administration of a trust. Commonly a Protector will, for example, have the right to approve any significant investment or disposition, and to remove a trustee. The Protector can be and often is the settlor himself.

However, the role of Protector has not been without its difficulties.
There has been much debate as to whether a Protector attracts a fiduciary duty – that is to say, a legal responsibility to act properly and in the best interests of the beneficiaries of the trust for which the Protector is answerable in law. A settlor or other non-professional may be rightly cautious to accept such a responsibility.

Indeed in Re the Circle Trust: HSBC International Trustee Limited v Wong and others (9 ITELR 676), the Cayman Grand Court recently concluded that where the trust instrument gave the power of appointment of the Protector to the beneficiaries (or some of them), the beneficiaries themselves took on a fiduciary responsibility to make an appointment that was in good faith and for the benefit of the beneficiaries as a whole.

Another potential problem is whether the residence of the Protector may be at least potentially relevant to the question of where the trust is “based”. In the high profile case of Charman v Charman, a Jersey Trust was transferred to Bermuda for that very reason, in order to ensure that there was no risk of a significant tax liability if a UK Protector were appointed to the Jersey trust.

What alternatives are there? One important option arises from Article 9A of the important fourth amendment to the Trusts (Jersey) Law 1984, which celebrated its first anniversary in October. There is no doubt that this piece of legislation was aimed at attracting trust business to Jersey. The retained powers provision in Article 9A is one example, and provides a real alternative to the appointment of a Protector. Traditionally it was fundamental to the existence of a trust that one person - the settlor - divests him/herself of title to and control of certain of his/her assets into a trust. As against that, the Law now provides (at Article 9A(2))that a trust shall be valid and effective notwithstanding that it includes fundamental and wide-ranging powers and reservations to the settlor, including the power to revoke the trust.

Whilst the extent of those retained powers would be anathema to a trust lawyer advising, say, 20 years ago as to the essential elements of a valid and effective trust, the result is that a settlor seeking to ensure that he retains a “proper” interest and a “proper” level of control in relation to a trust need not rely on the appointment of a Protector but can instead chose to ensure that the trust documentation grants him appropriate reserved powers as settlor.

In my view, having posed the question, I do actually believe that there is still a significant role for Protectors in appropriate circumstances.
The clearest example is to provide comfort to the settlor that matters will be administered appropriately after his death.

The majority of the concerns in relation to the role of Protector can be addressed provided parties to a trust are careful to take professional advice and make clear to the intended trustee and its advisors exactly what is intended and what is required. In that way a properly drafted trust with a duly appointed and empowered Protector can still give relevant support and comfort to a settlor, both in the administration of a trust during his lifetime, and after his death.

The questions is however illustrative of the evolving nature of trust business and (therefore) trust law. In business, if you stand still you go backwards. Trust business is no different. The global trusts industry is an ever-developing one, due in no small measure to the ability and imagination of the people in the trust industry, and the level of assets involved!

For further information in relation to the above please contact:

Advocate Simon Franckel

Partner, BakerPlatt

simonfranckel@bakerplatt.com

For more legal development articles and full information about our litigation services please visit: www.bakerplatt.com.

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November 2007