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To Protect and Serve: The Watchful Eye of a Protector

Introduction

A settlor might appoint himself, a close trusted friend or even a professional advisor to maintain a watchful eye over the trustees because he wishes to retain some degree of control of what are potentially unknown, and often distant, trustees to whom he is giving legal title of his property.For some it is a difficult concept to truly accept that you will, for example, no longer be the owner of the family home in which you have lived and raised your children or the shares in the business you have built up over the years.Therefore a settlor might wish to have some assurance that his intentions when creating the trust will be not be ignored by the trustees.

A settlor reserving too many trust powers to himself might experience adverse tax planning consequences and, therefore, there are two methods a settlor has of reserving a degree of control over the trust structure:

requiring the trustees to obtain the consent of a third party before being able to exercise certain specific powers; or
give certain specific powers to a third party who is not a trustee (such powers might include removal of trustees or appointment of trust assets).

The third party appointed to the role of keeping a watchful eye is commonly called the “Protector”.

The Protector

There is no definition of a protector in Jersey law principally because, I would suggest, to define the role could potentially remove the flexibility that the role offers.Therefore Article 24(3) of the Trusts (Jersey) Law 1984 leaves it to the trust draftsman by stipulating that:

“The terms of a trust may require a trustee to obtain the consent of some other person before exercising a power of a discretion”; and

Article 24(4) of the Trusts (Jersey) Law 1984 makes it clear that such person is not a trustee by stating that:

“A person who consents as provided in paragraph (3) shall not by virtue of so doing be deemed to be a trustee.”

Hence there is no statutory list of protector rights and powers.It is entirely decided by the settlor and the trustees when agreeing the terms of the trust for administration.

Furthermore whilst it is often the case that a single person is appointed as a protector, it is possible for a committee of protectors to act together either by majority or unanimously when exercising their powers.

The Powers and Rights of a Protector

A protector has negative and/or positive powers under the terms of the trust.Article 23 of the Trusts (Jersey) Law 1984 only deals with negative powers (i.e. consent is required), not positive powers (i.e. specific powers) and therefore we have no statutory guidance as to whether a protector can have positive powers. However, I would suggest that the trust document reflects the terms agreed between the parties and is flexible enough to allow for positive powers. I think there is little room for doubt that positive powers are allowed to be held by protectors, but the question arises as to whether those powers are fiduciary or not (see below).

Negative Powers:

Negative powers require a protector to provide his consent to the trustees under the terms of a trust in order to allow them to exercise their powers and/or discretions. Such powers will have been drafted to be specifically subject to the protector’s consent.Consent is usually required either prior or simultaneous to the trustees exercising their powers and/or discretions. Therefore the power is called “negative” simply because it prevents the exercise of trustees powers without the protector’s consent.

Generally, the powers of the trustees to which a protector may be asked to consent may include one or more of the following:

Power to appoint income and/or capital
Power to add or exclude beneficiaries
Power to shorten the trust period and/or terminate the trust
Power to change the proper law and/or forum of administration
Power to amend the terms of the trust
Power of investment
Power to borrow
Power to lend

It is unwise for all or a substantial number of the trustees’ powers to be subject to protector consent, particularly if the settlor is acting as protector, as it places a question over the independence of the trustees, their discretion and the integrity of the trust structure.

Positive Powers:

Positive powers are where a protector is given powers under the terms of the trust which would normally reside with the trustees. The powers are called “positive” because they are unilateral actions taken by the protector. Typically positive powers are restricted to the appointment of a successor protector and/or the removal of and appointment of new and additional trustees.

However, it is possible for positive powers to affect the trust property directly (i.e. power to appoint capital). As a protector does not have the trust property vested in him (hence he is not a trustee), it must be an implicit consequence that once a protector has exercised his positive power, the trustees, who do have the trust property vested in them, will follow the exercise of the protector’s power without their own discretion being exercised in accordance with the terms of the trust.

In such circumstances, both a protector and trustees should consider protecting their positions. Standard trust documentation should contain exoneration provisions for both a protector and trustees. However, I would suggest that both parties in addition protect themselves by obtaining indemnities from the recipient of distributions or even obtaining consent from beneficiaries (if possible) for taking certain action which might, for example, involve high risk investments.

Duties of Protector: A Fiduciary Position?

There is no doubt that a protector with negative powers occupies a “fiduciary” (from the Latin “fiducia”, meaning “trust”) position (Sociedad Financiera Sofimeca v Kleinwort Benson (Jersey) Trustees Ltd) [1993]. Therefore a relationship of complete confidence between the protector and the beneficiaries must exist. Legally speaking the protector will owe a duty of care towards the beneficiaries (not the settlor unless he also is a beneficiary).

When a protector is exercising his negative powers and providing consent, he must consider whether the proposed exercise of the trustees’ powers is in the best interests of the beneficiaries.This clearly will present him 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 must stand to reason that a protector with positive powers also occupies a fiduciary position to beneficiaries. It would seem a nonsense to say that a protector with positive powers does not hold a fiduciary position where trustees holding the same power would be in a fiduciary position.Also positive powers, as opposed to negative powers, can potentially have more impact on the administration of the trust and therefore it would seem illogical to state that a protector having negative powers is a fiduciary whereas a protector having positive powers is not a fiduciary.

A protector’s duty before exercising his positive powers 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.

Relevant Case Law

In Jersey, the Royal Court can judicially control a protector’s power. In Mourant v Magnus [2004] the Royal Court held that:

“A protector is in a position of a fiduciary and the Court must have power to police the activities of any fiduciary in relation to a trust whether he be called a protector or indeed by any other name.Such a jurisdiction is a necessary incident of the duties to protect the interests of beneficiaries, especially minor and unascertained beneficiaries, and to ensure that the wishes of the settlor are respected as far as may be possible and appropriate.”

Not only does the Royal Court claim jurisdiction over a protector, but it also suggests that all protectors are in a fiduciary position (regardless of having negative or positive powers).However, the case must be read in context. Under the circumstances it was essential for the Royal Court to define the protector as a fiduciary in order to exercise its inherent power to remove, what was alleged to be, an unsuitable person from being the protector. It was not specifically submitted to the Court whether all protectors were fiduciaries and therefore this case cannot simply be seen to be absolute authority as to whether or not a protector having positive powers also holds a fiduciary position.

In the matter of the Bird Charitable Trust and The Bird Purpose Trust [2008] the Royal Court confirmed its judicial supervisory jurisdiction over a protector and also considered whether a protector’s positive power to appoint successor protectors is a fiduciary power.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 (i) that there were a number of provisions of the trust document which supported the protector being a fiduciary and (ii) 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. Therefore the Royal Court found a protector having a positive power to be fiduciary, but such position was dependant upon construction of the trust’s terms.

Access to Trust Information and Remuneration

From a practical point of view, the settlor should ensure that the terms of the trust allow for the protector to have access, as required, to trust information and documentation in order to allow him to be able to exercise his fiduciary position fully and effectively. This is often overlooked in trust drafting as standard trust documentation restricts access to trust information (outside of the trustees) either in accordance with the Trusts (Jersey) Law 1984 and/or the judgment of re Rabiotti 1989 Settlement [2000]. However, if a protector has restricted access to trust information, how possibly can he successfully fulfil his duties? Access to information and confidentiality must be balanced and thereby the answer is to require a protector to sign an appropriate confidentiality agreement.

Whilst Article 26 of the Trusts (Jersey) Law 1984 provides for trustees to be remunerated for their services and reimbursed for their proper expenses, Jersey law is silent on whether a protector can be remunerated for his services and reimbursed for his proper expenses. Persons occupying a fiduciary position have historically not been paid for their services and hence statutory intervention has been required in order to allow for the remuneration of trustees. It is unclear if a protector can be remunerated (with the exception of all beneficiaries agreeing to it). However, it has become common practice for trust documentation to make similar, if not identical, provisions to those of trustees in respect of the remuneration and expenses of protectors.

Summary

The particular role of a protector is purely dependant upon the trust document in question. It is essential that trustees and the protector are both fully acquainted with the terms of the trust and any powers that are expressed to be in the name of the protector. Otherwise the trustees operate the risk of exercising powers without consent or exercising powers which in fact belong to the protector (and in both instances therefore acting in breach of trust).

In most instances, a protector will be a fiduciary with negative powers of consent who owes the beneficiaries a duty of care. Being a protector is an important role and it must be carried out by a trustworthy person. Typically a protector will be a close family friend because he will also be personally familiar with the beneficiaries in order to act in their best interests.However, it is important to realise that a protector might need to make decisions which require commercial awareness and/or experience and expertise in particular areas such as investment. Therefore it is prudent for settlors to either consider appointing a professional advisor to the role of protector or possibly appointing a committee of protectors where a combination of close family friend and professional advisors can reach decisions together.