Why trusts have protectors
A settlor who transfers assets to a professional trustee in another jurisdiction gives up a great deal of control. The trustee may be a company the settlor has never visited, staffed by people who will change over the life of the trust. A protector is a check on that arrangement. It is someone outside the trustee body who holds specific powers designed to make sure the trust continues to be run in the way the settlor intended.
The office developed in offshore trust practice and is now common in trusts governed by the laws of places such as Jersey, Guernsey, the Cayman Islands, the British Virgin Islands and the Cook Islands. Not every trust has one. Where there is a protector, the trust deed defines the role. The powers come from the deed, so two protectors of two different trusts may have very different authority.
Protectors can be individuals, often a long-standing family adviser or lawyer, or companies set up for the purpose. Some trusts appoint a committee of protectors who act together.
Typical protector powers
Protector powers fall into two broad groups. Some are positive powers, which let the protector do something directly. Others are negative or consent powers, which require the trustees to obtain the protector's agreement before they act.
Common positive powers include:
- Removing trustees and appointing new or additional trustees.
- Changing the governing law or the place of administration of the trust.
- Adding or excluding beneficiaries, where the deed allows.
- Appointing a successor protector.
Common consent powers include:
- Approving distributions of capital, or distributions above a stated amount.
- Approving the addition of new property or the sale of a particular asset, such as a family business.
- Approving changes to the trust deed or the exercise of a power to vary.
- Approving trustee remuneration.
A protector who holds only consent powers cannot initiate anything. They respond to proposals from the trustees and either agree or refuse.
Fiduciary or personal powers
An important question, and one that is not always answered by the deed, is whether the protector's powers are fiduciary. A fiduciary power must be exercised in good faith for the purpose for which it was given, which usually means in the interests of the beneficiaries as a whole. A personal power can be exercised more freely.
Many deeds state expressly that the protector's powers are fiduciary. Others are silent, and the answer then depends on the governing law and the nature of each power. Courts in several common law jurisdictions have tended to treat protector powers as fiduciary unless the deed clearly says otherwise. The practical point for trustees and providers is simple: a protector is expected to act properly, and a protector who refuses consent for obviously improper reasons may be challenged.
This is a legal question with real consequences, and trustees uncertain about it should take advice under the governing law of their trust.
How protectors and trustees work together
In a well-run trust, the protector and trustees communicate before decisions are made. A trustee considering a significant capital distribution will usually discuss it with the protector at an early stage, explain the reasons, and then send a formal request for consent. The protector replies in writing.
The protector does not manage the trust. Investment decisions, administration and record keeping stay with the trustees. A protector who tries to direct the trustees on day-to-day matters may be overstepping their role, and the trustees should resist that politely.
Equally, trustees should not treat the protector as a rubber stamp. A consent request should include enough information for the protector to make a real decision: the beneficiary, the amount, the reason, the effect on the remaining fund, and any tax points identified by advisers.
How protector powers affect payment instructions
From a payments perspective, the protector's position is simple to state. Payment instructions come from the trustees. The protector's consent is a condition that the trustees must satisfy before they instruct, where the deed requires it.
A provider handling a trust account will not normally accept a payment instruction from a protector, because the protector does not hold legal title and is not the account holder. The exception would be a deed that gives the protector a direct power over trust property, which is unusual. If a protector contacts the provider asking for a payment, the provider will direct them to the trustees.
What the provider may do is ask to see the protector's consent. At onboarding, the provider will read the deed and note which kinds of payment need consent. Later, when the trustees instruct a payment of that kind, particularly a large capital distribution, the provider may ask for a copy of the written consent before releasing funds. This protects the trustees as well as the provider, because a distribution made without required consent may be challenged by other beneficiaries.
A sensible approach is to agree at the start how consent will be evidenced. Some trustees send the consent together with the instruction for every relevant payment. Others hold consents on file and confirm in the instruction that consent was obtained, providing copies on request.
Identifying the protector
Canadian rules for money services businesses require identification of a trust's protector along with the trustees, settlor and known beneficiaries. Similar requirements apply in many other countries. Providers treat the protector as a person with potential control over the trust, because the power to remove trustees is in practice a powerful lever.
Expect the provider to ask for the protector's identity documents and proof of address, or for a corporate protector its incorporation documents, directors and controllers. Where the protector is a lawyer or regulated professional, the provider may still need full identification, though the risk assessment may reflect their regulated status.
When a protector changes, through retirement, death or removal, the trustees should send the provider the deed of appointment of the successor and the new protector's identification documents.
When a protector removes a trustee
The power to remove and appoint trustees is the protector power that most often affects banking directly. When a protector exercises it, the outgoing trustee loses authority from the date set in the deed of removal, and the incoming trustee gains it from the date of their appointment.
That change has to reach every institution holding trust assets. The new trustee will need to provide its own identification and corporate documents, sign a new mandate, and replace the outgoing trustee's signatories. Until the provider has processed the change, it may restrict the account to protect the trust, because it cannot be sure who has authority. A tidy handover, with the deed of removal, the deed of appointment and the new trustee's onboarding pack sent together, shortens that period. Our guide to changing trustees and banking walks through the steps.
When consent is refused or delayed
Occasionally a protector declines to consent. Where the power is fiduciary, the protector should have proper reasons, and a well-advised protector will set them out in writing. The trustees should then consider those reasons. Sometimes the refusal reveals something the trustees had missed, such as a tax point or a concern about a beneficiary's circumstances, and the proposal can be revised. Sometimes the parties simply disagree. In that case the trustees cannot make the payment, and their options are limited to what the deed and the courts allow.
Delay is more common than refusal. A protector who travels, is unwell or is simply slow to answer can hold up a planned distribution. Some deeds contain a deemed consent mechanism, under which consent is treated as given if the protector does not respond within a set period after a written request. Trustees relying on such a clause should keep evidence of the request and the date it was received, and should expect a payment provider to ask for that evidence in place of a signed consent.
Where a protector has died or lost capacity and no successor has been appointed, the deed may provide a fallback, such as the trustees or a named person appointing a replacement. Until that happens, payments that need consent may have to wait.
Corporate and committee protectors
Some trusts appoint a company as protector, often owned by the family's law firm or a professional services group. A corporate protector acts through its directors, so consents should be signed by authorised directors in line with the company's own signing rules. A provider identifying a corporate protector will look at the company's incorporation documents, its directors and the people who control it.
Where several individuals act together as a protector committee, the deed should say whether they act unanimously or by majority. Consents should be signed by enough members to satisfy that rule. Trustees should keep a current list of committee members, since a consent signed by someone who has already retired from the committee carries no weight.
Practical points for trustees
- Keep a short summary of the protector's powers on the trust file, cross-referenced to the deed clauses.
- Know which payments need consent before you instruct them, and diarise consent requests for planned distributions.
- Obtain consent in writing, signed and dated, naming the trust, the payment and the beneficiary.
- Tell the payment provider promptly about any change of protector.
- Where the deed is unclear about whether consent is needed, ask the trust's lawyers before paying.
- If the protector is unresponsive, follow the deed's procedures for deemed consent or replacement, if any exist, and take advice.
General information only
This article gives general information about the protector's role and how it interacts with payments. It is not legal advice. The powers and duties of a protector depend on the trust deed and governing law, and specific questions should go to the trust's legal advisers.
CCYFX acts for trusts on the instructions of trustees and their authorised signatories, and can reflect protector consent requirements in how payments are approved. Read more about our work with trusts.
