Protectors of Anglo-Saxon trusts: an old concept with a few pitfalls (part 1)

Summary: Protectors of trusts (and foundations) are often friends or long-time business partners of the trust settlor. We strongly advocate appointing of independent and professional protectors.

Initial situation

A wealthy entrepreneur, with his family scattered across several countries, wishes his wealth to be managed legally and tax-wise in a most optimal manner. His advisers recommend that he set up a trust under the Anglo-Saxon law* and transfer substantial part of his assets to this trust. The entrepreneur agrees. However, as he does not know and will rarely meet the trust company, which his advisers recommend to him (they are based in Cayman Islands), the advisers urge him to appoint a protector to represent his and his family’s interests. In this situation the following questions need to be addressed:

Who are the protectors of trusts?

The function of a protector does not constitute a regulated activity. Therefore, the spectrum of possible protectors can range from a school friend of the trust settlor, long-time business associates such as asset managers, or specialized companies that act exclusively and professionally as protectors.

The developments within the trust sector clearly go in the direction of professionalisation of the protector function.

• Family friends and godparents may find themselves easily overwhelmed in times of crisis while, at best, they are not impartial, being often too close to the events.
• Long-time business associates, such as asset managers or bankers, should, on the one hand, have in mind the interests of the beneficiary but, on the other hand, have financial interest in the trust’s assets. For this reason, some banks prohibit their employees from accepting such mandates.
• Trust companies or specialized consulting firms avoid the weaknesses of the aforementioned individuals and offer instead an independent, professional service. However, in such a relationship, proximity and connectedness to the settler and his family may be missing. Also, such an arrangement results in additional costs since professional protectors are generally remunerated with a fixed fee as well as an hourly fee.
• In the case of very large fortunes, a Protector Council, consisting of family members and professional trustees, is occasionally set up.

How is the role of a protector defined and what powers does he possess?

There is no legally binding definition of the protector. The function is best summarized as follows: a protector is not a trustee but a “watchdog” who controls the trustee and his activities.

The protector as a watchdog

His duties must be fully defined in the Trust Deed. In the today common Trust Deeds, the duties of the protector include at the minimum the dispositive decision-making authority to remove the trustee and to select a new one. In addition, protectors often have veto rights over decisions of the trustee.

These veto rights usually include:

• exclusion and addition of beneficiaries·
• distributions to the beneficiaries·
• investment strategies·
• granting of loans·
• changes to the Trust Deed
• changes to the relevant legal regulations, etc.

The list can be shortened or extended as desired and extends or curtails the autonomous decision-making authority of the trustee.

For whom does the protector work? For the settlor?

When establishing a trust, the settlor determines who should be the primary protector. Should it be a school friend, the lawyer, or a professional? With the appointment of the protector, the active relationship between the settler and the protector ends in principle. It is important to understand this statement.  The Protector is never a representative of the settlor, but rather he is solely committed to act in the interests of the beneficiaries. This may sound a bit strange, however, especially for discretionary irrevocable trusts (where the settlor irrevocably assigns his rights to the trust assets to the trustee), the protector must not become a puppet of the settlor, as this could invalidate the trust! 

In the second part, which will be published in the forthcoming issue of partners’ view in November, we will be looking at cases in which a protector becomes active, talk about basic pitfalls, and examine how protectors are treated in the Automatic Information Exchange (“AIA”).

* For the sake of simplicity, we refer in the following to discretionary irrevocable trusts (where the settlor irrevocably transfers his rights to the trust assets to the trustee). Other types of trusts, however, are subject to similar problems.

Written by:
Christian Rockstroh | Partner