Protectors, although perhaps not a common feature in discretionary trusts, pepper the trust landscape.
What is a protector?
There is no agreed definition of protector. As a general principle a protector is a person who, although not usually a trustee, has been granted certain powers relating to the trust. These powers range from powers to veto trustee decisions, to powers to appoint trustees and beneficiaries. Protectors can also have specified obligations,uch as following the death of a settlor. The difficulty in clearly defining the role was noted by Smith J in Rawson Trust Co v Perlman where it was said: “the term protector is not a term of art and is not known as such to our law”.
Academics have grappled with the question as to whether a protector is a fiduciary role. The significance of the question relates to what obligations the protector owes the beneficiaries or the appointing settlor. If the role is “all care no responsibility” (unlike that of a trustee, which is subject to certain unavoidable obligations and duties), what are the risks and what are the rewards?
Origin of the protector
The concept of the protector developed when settlors started to utilise offshore trustees to hold what might amount to significant wealth on trust. The protector’s job was to ensure the safe management of the trust and, conceptually, it is understandable why a protector might be required. Of course the converse argument might have been that if you don’t trust the trustee, or you are not confident that the trustee is a safe and desirable trustee, maybe you just stop there. Just a thought.
Why are protectors used?
Moving on. The role of protector has now flourished to some extent closer to home. Protectors have been used in New Zealand trusts as what could be viewed as a substitute for independent trustees. Whether this substitution has been effective or not cannot be conclusively determined until tested by the courts. The idea behind the “protector trust model” is that independent trustees are generally no more than ciphers who rubber stamp at the settlor/trustee’s behest and as such offer no true independence. The role of the protector can be to approve certain decisions during the settlor’s life and to get involved in the management of the trust on the death of the settlor/trustees.
Do protectors protect?
The idea of a protector as a back-up to monitor the trustees may seem sound.
However, the fundamental issue with protectors is that the parameters of responsibility and obligation are unclear. Trustees have fiduciary obligations. Whether or not protectors do will be determined on a case by case basis. Although there is limited case law regarding protectors, the case law that exists confirms that there is danger to both settlors who act in reliance on a protector’s bona fides, and also a protector who can unknowingly take on a trustee’s fiduciary obligations. See for example the Missouri case Robert T. McLean Revocable Trust v Davis where the protector was ultimately found liable for losses to the trust due to his failure to adequately supervise the trustees.
Whether a New Zealand court would reach the same decision, given that the protector in McLean Revocable Trust was found guilty in tort, rather than for breach of trust, is unclear. It may nonetheless give some protectors something to think about.
Remedies available against protectors
As for remedies against protectors the situation is that formally there aren’t any, as their role is not strictly fiduciary. The issue of protectors is one that the Law Commission has touched on its Review of Trust Law in New Zealand.
Protector reporting obligations
The OECD has confirmed that a protector of a trust classed as a reporting financial institution under the Common Reporting Standard (CRS) must always be treated as an accountholder. This means that a Protector is subject to the CRS’ regime of automatic information exchange between jurisdictions.
See OECD (PDF file)
Any settlor of a trust with a protector would be wise to review the appointment. If the trustees need supervision, a safer route might be to review the appointment of the trustees.
- Rawson Trust Co v Perlman  1 Butterworths OCM 31
- RC Ausnese, What Weath Management Professionals, Trust Officers and Estate Planners Need to Know about Trust Protectors
- Robert T. McLean Revocable Trust v Davis 283 S.W.3d 786 (Mo. Ct. App. 2009).