In the first part of this article, we provided a summary of the different types of protectors as well as their rights and obligations. Below, we will outline situations in which the protector of a trust plays a really important role and highlight what can go wrong in dealing with protectors.
In practice, protectors usually only come into play when they are advised by the trustee of forthcoming decisions that require their approval. Another example is when a change of trustee is required for various reasons.
We believe that protectors should take a rigorous approach to interpreting their role as a watchdog. Protectors have a right to access information and should exercise it, for example to request the annual financial statements, or to monitor the costs of the trust and gain an impression of how the asset managers are performing. Assuming the role of an active watchdog can protect the trust’s assets and avoid any unpleasant surprises for the beneficiaries.
One extremely difficult task borne by the protector is to act as a mediator between the beneficiary and the trustee.
A friend of the family or a longstanding associate at a bank may have closer ties to the family than a professional protector, but generally tends to be a “sunshine” protector who will be emotionally and professionally challenged in a complex dispute situation. Moreover, there is a risk that a friend of the family will be torn between their amicable ties to the founder and possible litigious relationships within the family. In short, protectors cannot be impartial if they are a friend of the family as they will have to take the side of one of the parties in the dispute. This can shatter the relationship between the beneficiary and the protector and prevent the latter from fulfilling their assigned role.
Thus, it is important to raise awareness of the job of a professional protector. Professional protectors have to fulfil their role as defined in the trust deed and conscientiously exercise their function as a watchdog. In addition, they should establish and maintain regular, confidential contact with the family and act as a mediator to provide any necessary advice and support to the trustee and the family. We therefore recommend that protectors take a pro-active approach to their duties and demonstrate their commitment to the trustee and family.
There is no guarantee that protectors will not take advantage of their position in accordance with the trust deed to act against the interests of the beneficiary. To provide an example: after the settlor dies, the protector fundamentally and consistently refuses to sign off payouts to the beneficiary as he disapproves of the beneficiary’s lifestyle (“good-for-nothings who don’t deserve to receive anything from the trust property”). Although this is an extreme example, it is a possibility.
When all is said and done, the purpose of the protector is to protect the beneficiary from incompetent, uninterested or dictatorial trustees. But what happens if the protector himself is or becomes incompetent, uninterested and dictatorial? The conditions under which a protector can be dismissed are set out in the trust deed. Beneficiaries usually have very limited opportunities to take legal action against a trust protector. In the above case, the trustee has to appeal to the relevant court to remove the protector from office. It is possible that a dispute will continue in court for several years at the expense of the trust property. However, this is a step that the trustee cannot avoid.
And now for a health warning: protectors are registered as “controlling persons” or even “account holders” under the automatic exchange of information and are reported to the relevant tax authorities. Depending on the particular configuration, this may mean that the value of the trust property and information on payouts will have to be reported together with the name of the protector. Private protectors may be in for an unpleasant surprise if at some point they are asked by their tax authority for additional information on a trust in which they are a protector.
* This article is the final instalment in a two-part overview of this topic. The first part was published in the September edition of partners’ view.
Written by:
Christian Rockstroh | Partner
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