BY NICOLE SILVER
The Trust Protector’s role is created by the Trust Agreement to add an additional layer of protection. A Trust Protector is a person or company that is appointed by the Settlor to ensure the Trustee acts according to the trust instrument and in accordance with the settlor’s intentions. For example, if a women named Claire was the Settlor of a trust, and she appoints her brother named Mitchell to become the Trusts Protector. This may assist Nancy, the Settlor to feel comfortable transferring the assets to an offshore Trustee as the Trustee is usually in another jurisdiction and the Settlor may not have met the Trustee. This role is the balance of power between the Trustee, the Settlor and the Beneficiaries.
A Trust protector, Mitchell is not involved in the day to day administration of the trust however he provides the check and balances on the Trustee. In most cases Mitchell’s role is fiduciary in nature as he must act in the interests of the beneficiaries. Where the protector is a professional protector or agency there is a higher duty of care expected.
Mitchell’s powers may be wide or narrow depending on the intentions provided in the trust instrument. There is a risk where Mitchell is given wide powers and majority of the trustee actions need to be consented to by him, there is a risk that the trustee is deemed to be a custodian. This is especially a concern where the settlor is acting as protector.
The Negative Power
The negative power is that Mitchell has the right to refuse to consent to an action for which the trust agreement requires consent by him (veto power). Mitchells veto power is not limited to actions of the Trustee. This power must be limited to important changes to the Trust Agreement or beneficiaries. Not only is there a risk of the protector deemed to have to much control of the trust but the administration of the trust may suffer.
Normally Mitchell has the power to remove the trustee, in theory this is a great protective power against the trustee should the trustee fail to administer the trust correctly.
However there is a risk where the Protector is based in the US. In this case Mitchell is located in New Zealand. However, the US Courts tend to assert their governance over any US person living in the US at the time as well as US based assets even when held by a foreign entity. If an offshore trust had an action brought against it, the Court may hold the Protector in contempt of court and compel them to remove the trustee in order to penetrate the trust, and the assets making them available for a judgement.
The Positive Power
The positive power is the ability to direct the Trustee to take some action, these include removing and appointing a Trustee, moving the Situs (governing law) of the Trust and appointing successor protectors. This positive power is a key feature of an asset protection structure in that it can be enforced when the asset protection of the structure is under threat, such as when the Co-Trustee or Protector is a resident within the jurisdiction of the Court that is attempting to weaken the Trust. The Protector can remove the Co-Trustee, appoint a successor protector and resign themselves in order to protect the Trust and its assets.
The option to appoint a protector is a personal preference, however, a warning to US clients who have a US based Protector, and this role can be used by US courts as a back door into the trust. There needs to be limitations placed on the role of Protector in order to maintain the integrity of the offshore structures asset protection features.