In this article, the author examines what is meant by a trust protector, their role and purpose.

Here is another article – part of a series – from Roman Kubiak, who is partner and head of private wealth disputes at law firm Hugh James. He discusses the role of protectors in the trusts world and the challenges which can arise. (See the first and second and third and fourth articles in this series.) The editors are pleased to share these views; the usual disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The role of trust protectors has become increasingly prominent in modern trust structures, particularly in the offshore trusts world. Often described as the "watchdogs" of a trust, protectors are seen as providing a “check and balance” on the powers and discretions conferred on trustees. Their powers can vary widely, from the ability to remove and appoint trustees to vetoing certain trustee decisions. As their use has grown, so too have the legal questions surrounding their roles, duties, and the extent to which they can challenge trustees or be challenged themselves.

The term ‘protector’ has no statutory definition in many of the offshore trust jurisdictions and their roles, including the remit of their powers, has been a topic which both the courts and trustees have grappled with in recent time. 

The most common theme with the numerous cases which have come before the courts has been the extent to which any powers vested in protectors are either fiduciary or beneficial.

While trust protectors are less common in UK domestic trusts, English courts have been called upon to consider their role, particularly in the context of offshore trusts.

PTNZ v AS [2020] EWHC 3114 (Ch) involved four family trusts settled in 2008, governed by English law but administered in Jersey.

The claimant was a New Zealand-based corporate trustee who originally sought the court's approval for two "momentous decisions" (i.e. a Public Trustee v Cooper blessing application) made in 2017 and 2019 regarding trust restructuring.

However, the main issues before the English High Court were the validity of the appointment of a UK-based protector which had sought to be effected by the settlor’s “heirs” under Monegasque law, where the power to appoint protectors had been given to the settlor’s “executor, administrator or personal representative,” and, if valid, whether the new protector's consent was required for the trustee to exercise its decisions.

The court ruled that the appointment of the new protector was valid, interpreting "executor, administrator or personal representative" in the trust deed to include those with equivalent roles under foreign law.

The court determined that the protector's power of consent is a joint power with the trustee, not merely a power of review. This meant that the protector could withhold consent even if the trustee was acting reasonably.

It went further by confirming that the new protector's consent was required for the trustee's decisions, including those made before his appointment, emphasising and reinforcing that a protector's powers are fiduciary unless the trust deed clearly states otherwise.

Over in the Bahamas we had the case of Rawson Trust Co Ltd v Perlman [1990] 1 Butterworths OCM 31. The trust deed appointed four protectors all of whom were also beneficiaries. The trustees required the unanimous consent of the protectors to exercise all powers. There was a dispute and the settlor’s wife ended by consenting to the transfer of the trust funds to another trust under which she was named the sole protector. 

The court held that the power of veto had been given to the protectors to protect their own interests as beneficiaries and so was not fiduciary and, thus, not subject to the control of the court.

One of the leading cases in the Cayman Islands is Re Z Trust (1997) which also affirmed the Rawson decision. This case focused on the classification of a power to amend the trust, vested in the management committee composed of both beneficiary and non-beneficiary members. The committee could amend the trust jointly with the settlor before the death of the settlor or her daughter afterwards, who was a principal income beneficiary and part of the committee. The power was used to allocate 50 per cent of the capital to the settlor’s daughter, a decision challenged by the contingent capital beneficiaries.

The court concluded that the power of amendment was personal rather than fiduciary, although other powers held by the committee might be fiduciary. It based this on (1) the committee's inclusion of beneficiaries, (2) the settlor’s intention, and (3) the limitation that the power was exercisable only jointly with the settlor during her life or her daughter's.

Regardless of whether a power is personal or fiduciary, it must be exercised in good faith and for its intended purpose. The court can intervene to prevent abuses. Questions concerning protector powers are matters of construction; it may matter if the protector is a beneficiary. Some powers, such as removing or appointing trustees, are typically fiduciary. However, in Re Z, even a power to direct trustees might not be fully fiduciary if held by a beneficiary.

In affirming Rawson, Re Z noted that a protector's power to consent to re-settling trust funds was not fiduciary when the protector was a beneficiary allowed to further their own interests by the trust settlement.

In Bermuda the courts have adopted a narrower view of the role of protectors. The 2021 case of Re The X Trusts [2021] SC (Bva) 72 Civ involved proceedings relating to the proper role and functions of protectors, specifically, in that case, relating to their power to veto trustee decisions.

Two views were put forward. The first, which was called the “narrower view,” was that the protector’s role was "to satisfy themselves that the proposed exercise of a power by the Plaintiffs (as trustees of the X Trusts) (or any of them) is an exercise which a reasonable body of properly informed trustees is entitled to undertake and, if so satisfied, to consent to the same" i.e. to act as a “watchdog.”

The ”wider view” was that the protector’s role was “to exercise an independent discretion as to whether or not to give consent to a proposed exercise of power by the Plaintiffs (as trustees of the X Trusts) (or any of them) which requires the protectors’ consent, taking into account relevant considerations and disregarding irrelevant considerations so that the protectors might withhold their consent to a proposed exercise of power by the Plaintiffs even if the proposed exercise of power was an exercise of power which a reasonable body of properly informed trustees was entitled to decide upon (the latter being a relevant factor, but not the only relevant factor, for the protectors to take into account)."

Ultimately, it decided that the protector’s role was more akin to the narrower view.

Meanwhile, not long after that decision, in Jersey we had the 2021 case of In the Matter of the Piedmont Trust & Riviera Trust. While that case dealt with a number of issues, the key one for the purposes of this article was, again, the extent of the protector's role when trustee decisions were subject to the protector’s veto.

The Jersey court analysed a number of key cases and principles including:

1.    Re A and B Trusts [2012] (2) JLR 253, which confirmed that a protector's paramount duty is to the beneficiaries of the trust, not to ensure the settlor's wishes are carried out, a view mirrored by the Royal Court of Guernsey in the 2015 case of Re K;

2. Rawcliffe v Steele 1993-95 MLR 426 which confirmed that the protector must consider the exercise of powers from the point of view of the beneficiaries under the trust; and 

3.    the Re The X Trusts case.
Here, however, the court rejected the view that a protector's role is limited to assessing the rationality of trustees' decisions (the "Narrower View"). Instead, it adopted the "Wider View" that protectors have an independent discretion when deciding whether to consent to trustees' decisions.

Nonetheless, it emphasised that protectors must act in good faith in the best interests of the beneficiaries and must reach their own decision, considering relevant factors and ignoring irrelevant ones. It did note that there are limits on the protector’s role, namely that they should not dictate to trustees how they must exercise their powers and that their role is not to make the initial decision, but to decide whether to consent to the trustees' decision.

The court also found that trustees should provide protectors with their detailed reasoning for decisions requiring protector consent. What documents and information might be reasonably necessary would vary from case to case, but a good starting point was

-    a copy of the trust instrument;
-    any ancillary instruments modifying the beneficial interests or the terms of the trusts;
-    deeds of appointment, removal or retirement of trustees and protectors; and 
-    any letters of wishes addressed to the protector or the trustees.

The protector might also require:
-    trust accounts and documents relating to the investment of trust assets;
-    correspondence and minutes of the meetings of outgoing protectors;
-    correspondence and minutes of trustee meetings; and
-    documents revealing the deliberation of former protectors and/or trustees where those discussions might impact on how the protector exercises its power.

While trustees are in general not obliged to supply their reasons for a discretionary decision to a beneficiary, the positions of a beneficiary and a protector holding a fiduciary position were completely different.

The judgment acknowledges that this approach may lead to deadlock between trustees and protectors but sees this as a natural consequence of the settlor's decision to introduce the office of protector.

The court's decision highlights the importance of the protector's role in offshore trusts, viewing it as more than just a rubber stamp for trustees' decisions. This interpretation gives protectors significant power in trust administration, particularly in ensuring that trustee decisions align with the best interests of beneficiaries.

While there is nothing in statute to deal with difficult protectors, the courts have readily invoked their inherent jurisdiction to deal with them.

For instance, in the Manx case of Steele v Paz [1993-95] MLR 426, the court invoked its inherent jurisdiction to appoint protectors where it was necessary for the trust's proper functioning.

In Jersey, in Re The Freiburg Trust [2004] JRC 056 the court removed protectors for due cause, emphasising the fiduciary nature of the role.

And the Guernsey case of In the Matter of the K Trust Guernsey Judgment 31/2015 affirmed the court's power to remove protectors under its inherent jurisdiction when their remaining in office adversely affects beneficiaries' welfare.

So, what are the practical implications of all these decisions?

Well, these cases collectively demonstrate that:
1.    Courts generally view protectors as fiduciaries, even if not all their powers are fiduciary in nature.
2.    The specific powers and duties of protectors depend on the trust instrument and the settlor's intentions.
3.    Courts have the power to appoint, remove, and oversee protectors to ensure proper trust administration.
4.    Protectors must generally act in good faith and in the best interests of beneficiaries, even when their powers are described as "personal."
5.    Conflicts of interest and breakdowns in relationships with beneficiaries can be grounds for protector removal.

For settlors and those drafting the trust deed:
1.    It is crucial to define the protector's role and powers in the trust deed clearly.
2.    Consider including provisions for protector removal and replacement.

For protectors:
1.    There is an increased need for caution in exercising powers.
2.    These cases highlight the importance of documenting decision-making processes.
3.    Protectors should consider seeking professional advice or court blessing for significant decisions.

For trustees:
1.    It is important to navigate relationships with protectors carefully.
2.    Equally clear communication and documentation in interactions with protectors is vital.

Finally, for beneficiaries:
1.    There is a growing awareness of the ability to challenge protectors.
2.    There is also a clear importance of understanding the protector's role in their specific trust structure.