Death & Taxes S6: E2 – The role of trust protectors after A v C

Simon (00:54)

Hi Helen.

Justin

Hi.

Helen (00:55)

I think a good starting point would be for those listeners who are perhaps slightly less familiar with trust structures. Simon, could you just give us a quick summary of what a protector is and the role they have in trusts?

Simon (01:07)

Sure, I’ll get started with what a trust is first. So first, a trust is a legal arrangement where a person, the settlor, transfers legal ownership of an asset, which can be a property, cash, investments, to another party, the trustee, who will then manage that asset for the benefit of a third party, the beneficiaries.

And usually, this type of arrangement is set out in a trust deed, and that trust deed will sometimes provide for a protector. And a protector will have certain powers, for example, to remove and appoint trustees, or certain trustee decisions will be subject to the protector’s consent. And so, the protector is someone who has a role in the trust with powers.

And usually, a protector will have fiduciary duties, things such as they have to act in good faith.

Helen (02:14)

And act in the best interest the beneficiaries.

Simon

Yes, of course.

Justin (02:16)

And protectors are a real feature of the offshore world. Traditionally, a protector was someone known to the settlor, someone close to the settlor, the idea being that they could reflect the interests, or knew the interests and the intentions, of the settlor, whereas a trustee might not.

Helen (02:41)

Excellent. Okay, thank you. That’s a very helpful summary to start off the discussion with. So, I think the next big thing we need to look at is what was the decision in A v C and why has this decision had so much tension in the trust world?

Simon (03:01)

It’s an important decision because it looked at the role of the protector, particularly where the trustee doesn’t really clearly define that role. The case was about a trustee proposal to restructure a series of trusts in Jersey, Bermuda and England, with different protectors, but the case looked at a series of examples of protector provisions.

They were all relatively similar. And the trustees were proposing to do a major restructuring of these trusts and to appoint a large amount of assets to two branches of the family. And in that case, the protectors were not inclined to give consent because they didn’t believe that proposal was in the best interest of the beneficiaries.

Justin (03:55)

And what’s also interesting about the decision is that the Privy Council has overturned two previous decisions from the courts in Bermuda. So, the Supreme Court and the Court of Appeal in Bermuda both looked at these powers and held that the protector’s role was the narrow role. And in fact, it’s generally accepted in the industry that this case was used as an opportunity to try and push for a default definition of a protector. And so having, with that background and with two courts in Bermuda having both reached one outcome and the Privy Council having reached a very different outcome, it’s clearly a very significant decision.

And, of course, what’s also extremely significant is what happened in the courts below. In the Bermudan Supreme Court and in the Bermudan Court of Appeal, both courts concluded that the protector’s role was the narrow role. And what I mean by narrow role is a role where the protector simply is there to review the legality and the rationality of the decision that the trustees have taken. Effectively, it’s a supervisory role and the protector doesn’t go any further than that. But what the Privy Council held is that the protector’s role wasn’t a narrow role, it rejected that position entirely, held that there was no basis for it, and held that the protector’s role is a wide role, but also including the narrow role.

And so, what that means is that the protector’s role is to review the legality and rationality of the trustee’s decision, but also that the protector has a free decision as to what it, or he or she, believes is the appropriate outcome to that particular decision. It is not simply rubber stamping.

Helen (06:37)

In terms of what the court decided, what do you think is the biggest misconception about protectors that the decision has challenged?

Justin (06:47)

The biggest misconception is the point I was just making, which is this idea that protectors are there as a referee or are there simply to rubber stamp trustees’ decisions. This Privy Council decision has explained that that is not the case at all. Unless the trust deed in question specifically defines the protector’s role as being that narrow, it will be the wide role.

Simon (07:17)

So, does that mean that a protector can essentially agree with the trustee decision in that it’s rational and legal, but then when it comes to whether it’s in the best interest of beneficiaries, disagree with the trustee?

Justin (07:28)

Yeah, theoretically, yeah.

Helen (07:31)

So, in practice then, what does that mean for a trustee who wants to seek protector consent for an action or a decision?

Simon (07:39)

I think that means that the protector is now almost on par with the trustee when it comes to decisions where protector consent is required. And that also means, I think, there’s going to be some sharing of information between the trustee and the protector and a dialogue between the two parties.

Justin (07:58)

So, does the protector then need effectively as much information as the trustee has had to make its decision?

Simon (08:07)

Yes, essentially and potentially, yes. As much information as the protector needs in order to reach its decision, yes.

Helen (08:19)

So, how in practice should they go about providing that information?

Simon (08:24)

It really depends on where the trustee is in its decision-making process. If the trustee is at the start of reviewing everything, then the protector should be involved quite early in that process. If it’s already made quite some way into making the decision process, the trustee will need to consider how to bring up to speed the protector, what kind of information will need to be shared at that point. And if it’s towards the conclusion of that exercise, then the trustee again will need to consider how best to bring up to speed the protector.

Justin (09:01)

And what I think it’s really calling for is a much, much more collaborative approach between trustees and protectors in relation to decision-making so that the protector is brought along with the trustee at every stage of the decision-making process so that the protector can discharge this wider role. And that, I think, is going to be a change for some trustees. I’ve certainly dealt with trusts where trustees have made decisions that required protector consent with no protector involvement whatsoever. They’ve dealt with the decision-making process from start to finish, made that decision and then gone to the protector to seek consent. And I think all of that is going to need to change. Hopefully that will be a good thing in terms of getting the protector on board with the decision-making process and running it in parallel.

Helen (10:03)

Again, from a practical perspective, if you are a trustee, does this decision have implications for how trustees should record their decisions and the records they need to keep?

Simon (10:15)

Yes, I would say so. I think the trustees will want to have their minutes a bit fuller, just so that the protector has enough information to fully understand how the trustees reached that decision and enough information that the protector can reach its own decision as well.

Helen (10:34)

Should the protector be taking similar notes and making similar records?

Simon (10:39)

Yes, potentially, given it’s enlarged role now, I think it would make sense for the protector to also make those notes to show what information its reviewed and considered and any facts it has disregarded because it’s not relevant.

Helen (10:58)

That’s really helpful to know, thank you. That’ll be a really important thing for trustees and protectors to bear in mind going forward to avoid future disputes and issues that might arise. So, does this mean that now is a good time for trustees and settlors to review their trust documentation? And if so, are there any specific provisions they should be focusing on that relate to this case?

Justin (11:19)

Absolutely, any trust that has a protector, the trust deed now needs to be reviewed. What the advisers reviewing the trust deed need to look for is the provisions in the deed that require protector consent and any other provisions which give an indication as to whether the protector consent role is the narrow or wide role,

because I think one of the things that potentially might happen following A v C is that there will be a sort of default assumption that it will be the wide role in all cases, and I don’t think that’s the position at all. In fact, A v C was specifically decided on the facts of that case and the interpretation of that particular trust deed and so there’s a lot of talk in the industry about this being a default

decision that will apply across the industry, but I don’t think that’s quite correct. Then, having identified whether it’s a narrow or wide role situation, and the likelihood is that it will be a wide role because hardly any trust deeds specify the nature of the consent power of a protector. Having done that, what then needs to be identified is

what protections and provisions are there in the trust deed in relation to that protector role. So, does the protector, for example, have indemnification on a par with the trustee or indeed any indemnification at all? Does the protector have a right to call for information from the trustee or potentially from beneficiaries? Does the protector have the ability to instruct legal advisers?

Does the protector have the ability to recover expenses that he or she, or it, incurs in that role as protector?

Helen (13:20)

So the protector doesn’t end up in a worse position than they would have done prior to this case?

Justin

Yes

Helen

Excellent. And I suppose running on from that, we would often see a protector being an individual, maybe an individual who knows the family a bit better than, say, the professional trustee might and so they’re there to act as the check and balance for the family’s interests. And specifically for those individuals, what are the implications

for those individuals who act as protectors for family trusts? Is there anything specific to them that they should be considering?

Justin (13:57)

Well, I think a lot of it depends upon where those individuals were coming from before A v C. Is this a surprise to them? So, did, for example, those individuals regard the role of protector as being wide in any event? There are also issues in terms of whether the protector’s role, assuming it’s wide, and their engagement with the trustees, whether that can be dealt with harmoniously or whether it leads to conflict. And, in the event that there is conflict, I think there’s an issue in relation to whether that will eventually lead to litigation.

Helen (14:42)

So, with this added responsibility for protectors, do you think this could push towards more professional protectors being appointed?

Justin (14:52)

I think it depends upon whether this case is going to result in there being more or less litigation around protector decisions and the interrelationship between trustees and protectors. I think the other point that’s relevant to whether there will be a move towards more professional protectors is how trustees, protectors and beneficiaries react to the situation where a protector finds that the trustee’s decision is legal, that it was rational, but they nevertheless substitute their own decision in its place.

Now, that doesn’t mean that the protector’s decision will apply. What that means is the decision has to bounce back to the trustee, and that process could keep happening until the trustee and the protector reach agreement. But that very process and that concept, I think, of protectors proving legality and rationality, but making their own decision, that must be potentially prone to litigation. And if individual protectors see that happening, I can well imagine them considering their role, and that, in itself, may push towards a tendency for professional protectors.

Helen (16:13)

Absolutely, I can see that some listeners may think this all sounds quite daunting. Should protectors be concerned that they’re having to make their own decisions in this way?

Simon (16:24)

No. At the end of the day it’s all about the process. Protectors are in this type of case, fiduciaries. And so as long as they have the process down right in terms of getting information, the kind of information they need, considering the relevant factors and disregarding irrelevant factors, that should make the decision relatively easy. So, no.

Helen (16:54)

That’s very reassuring, thank you. So, to round off, if listeners take away one practical message from this decision, what do think that should be?

Justin (17:07)

Very self-interestedly, I’m afraid, I think the answer to that is that protectors and trustees are no longer in the world where they can deal with these issues alone. And I think unfortunately it means that there’s going to need to be more legal advice sought in relation to the interrelationship between trustees and protectors where this wide role applies.

We’re out of the world where protectors can simply assume that their role is something. They need to identify precisely what their role is. And unfortunately, there is this complication that we discussed earlier where the Privy Council’s decision that the protector’s role is the wide role also encompasses the narrow role. And so it’s not as if the protector simply gets to make their own decision. They’re also obliged to consider legality and rationality before coming to their own decision. So, the whole process itself is actually quite complex. And in fact, one of the points made in A v C around legality and rationality was that there was nothing in those trusts to suggest that the rule was that constrained and that in fact, if that had been the settlor’s intention, the actual identity of the protectors might probably have been lawyers, as in people who can judge legality and rationality, so hence I am saying there’s going to need to be more legal advice taken in relation to the role.

Helen (18:57)

Absolutely, it’s definitely a complex situation. Thank you very much to both Justin and Simon for those very helpful insights. And thank you to you for listening to this episode of Death and Taxes – and everything in between, the private wealth podcast from Burges Salmon. If you’d like to learn more about the issues covered in this episode or discuss how they may affect your trust structures, please do get in touch. You can listen to our previous episodes at Burges-Salmon.com or on our LinkedIn page.

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