Demystifying Trust Protectors

There is no express definition of protector in The Trusts (Guernsey) Law, 2007. In Guernsey, the term “protector” is not a term of art. Rather, it refers to any entity occupying an office created by a trust instrument distinct from that of a trustee, whether or not referred to as a protector, upon which has been conferred powers or rights enabling the office holder to participate in the administration of the trust.

Frequently, the protector is selected by the settlor of the trust to seek to ensure that the exercise of the trustee’s powers is, to some extent, supervised by an independent party.

The nature of the rights and obligations of a protector are defined by powers and duties in the trust instrument.

Fiduciary position

Whether a protector occupies a fiduciary position depends on the nature of the powers they are given within the trust instrument; in exercising certain powers they may be under a fiduciary duty, and in others they may not.  For example, a protector may have a power of appointment or removal of the trustee, which will ordinarily be classified a fiduciary power; however, the same protector may also be a beneficiary with an unlimited power to appoint assets to themself, which will ordinarily be classified as a personal power.

There may, however, be circumstances in which the Court must determine whether a protector is a fiduciary in relation to the trust as a whole, rather than by reference to the exercise of a particular power.   Provided the protector’s powers under the trust instrument are sufficiently extensive and fiduciary in nature, notwithstanding that some are personal, he may be deemed the occupier of a “fiduciary office” and thus subject to removal by the Court (if such an application was made).

As the law is still developing in relation to protectors, the Court tends to draw an analogy between protectors and trustees (where there is a wide body of case law). However, it should be noted that there is no such thing as “fiduciary duty of protectorship” per se.

Personal & fiduciary powers

Most powers, whether fiduciary or not, will have some form of limitation on how they may be exercised.  Where a protector’s power is limited in scope by the trust instrument then, although he does not exercise it in a fiduciary capacity, he must nevertheless exercise it within those limits, otherwise the exercise will amount to fraud on a power. In such a case, the exercise will generally be declared void to the extent of the transgression, or the protector may be ordered to pay compensation (for example to reconstitute the trust fund) in the event of loss to the beneficiaries.  However, in the case of an unlimited personal power, its exercise will not generally be subject to the supervision of the Court.

Where the trust instrument contemplates that the grant of a power to a protector places them in a relationship of trust and confidence with the beneficiaries, the protector will owe fiduciary duties whenever he exercises that power.

Equitable duties

In addition to the core fiduciary duties, there are other duties which arise out of the fiduciary relationship between protector and beneficiary such as a duty to periodically consider the exercise of any fiduciary powers, and a duty to exercise an active discretion.

The number of settlors opting for professional protectors is on the rise. Professional protectors should have the necessary technical expertise to hold the trustees to account, and how to exercise their powers in the interest of the beneficiaries. Further, they should be able to build professional relationships with the beneficiaries in an impartial manner.

In Guernsey, any professional protector is required to be licensed by the Guernsey Financial Services Commission, meaning that there would always be an additional layer of oversight to ensure the proper administration of the trust.

 

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