Trust Protectors: Powers, Duties and Removal

Tuesday 11 October 2016

Settlors of offshore trusts frequently appoint a ‘Protector’ to supervise the trustees’ administration of the trust and to ensure that they are acting in accordance with their duties, with the extent of the Protector’s duties and powers being set out in the trust deed. Protectors are often trusted friends, family members or professional advisors and they are often given the power to remove and appoint trustees. 

However, relationships between Protectors and other parties to a trust can occasionally deteriorate, resulting in in disputes focussing on the Protector’s conduct, and calling for his or her replacement.

Two recent offshore judgments illustrate the types of disputes that can arise.

In the representation of Jasmine Trustees Limited & another [2015] JRC 196 (Jersey)

Background

In Jasmine Trustees Limited [2015] JRC 196, the Royal Court of Jersey provided clear guidance on the fiduciary duties owed by those charged with appointing and removing trustees and Protectors.  This case related to two family trusts, the Piedmont Trust (P Trust) and the Riviera Trust (R Trust). There was a relationship breakdown between a father and his sons, on the one hand, and his daughter, following contentious U.S. litigation.  The beneficiaries of the P Trust included the father, sons, daughter and their children. The father was the Protector of the P Trust and Jasmine Trustees Limited (Jasmine) was the trustee. The beneficiaries of the R Trust were the same as the P Trust, but with two additional adult beneficiaries. The father was the Protector and both Jasmine and Lutea Trustees Limited (Lutea) were the trustees.

The father exercised his purported powers as Protector to:

  • Remove Jasmine and Lutea as trustees and appoint another firm (Kairos) in their place (despite there being unanswered questions and a lack of consensus among beneficiaries regarding Kairos).
  • Retire as Protector of the R Trust and P Trust and appoint his sons in his place.

In the event of a Protector’s retirement, the P Trust deed required a majority of adult beneficiaries to appoint a replacement. All beneficiaries except the daughter consented to the sons’ appointments.

Jasmine and Lutea challenged the validity of the appointment of Kairos, while the daughter sought a declaration that the appointment of the sons as Protectors was invalid due to their conflict of interest and past behaviour.

Decision

The Jersey Court referred to the Cayman Islands Grand Court decision of Re The Circle Trust [2006] CILR 323 and agreed that the power to appoint a Protector or a trustee is a fiduciary one, even when vested in someone other than a trustee (such as a Protector or even a beneficiary, as in this case)[1]. The court then set out a non-exhaustive list of principles for fiduciaries when appointing trustees and Protectors:

  • To act in good faith and in the interests of the beneficiaries.
  • To act as a reasonable appointer would.
  • Not to act for a ulterior purpose.
  • To only take into account relevant matters. 

The court was careful to note that its powers were only supervisory in nature and that it would not overturn decisions simply because it would have decided otherwise. However, the court found that there were cases where a decision was so unreasonable that the court should intervene.

The court decided that the father’s pronouncements as Protector had been invalid for unreasonableness. With respect to the appointment of the new trustee, the court agreed with Jasmine and Lutea that the father had failed to establish that Kairos had the relevant expertise and financial standing. The court, and the parties, agreed that the father’s purported removal of Jasmine and Lutea was so closely linked to the appointment of Kairos that they could not be separated. Ultimately, the court ordered that neither Jasmine, Lutea nor Kairos should be trustees and that another, untainted firm should be appointed.

As to the appointment of the sons as Protectors, the court was careful to indicate that it would not normally have intervened with the appointment. There was no inherent problem with the potential conflict of interest in having the brothers act as both Protectors and beneficiaries (and, in fact, the settlor of the trust had initially contemplated the father being both Protector and beneficiary). Further, it was found that the P Trust deed contemplated that the father’s children would succeed him as Protector anyway, despite them being beneficiaries too.

However, the court ultimately agreed with the daughter that her brothers were unlikely to act in her best interests. In particular, their conduct in the context of the U.S. litigation evidenced their willingness to act contrary to their fiduciary obligations, and because they had historically displayed a willingness to always follow their father’s word. Further, the appointment would be detrimental to the trust because the daughter would surely challenge any of the sons’ decisions on the ground of conflict of interest, thereby making the trust unworkable.

In the matter of the K Trust (Guernsey Judgment 31/2015)

Background

In Re K Trust (Guernsey Judgment 31/2015, Unreported, July 2015), the relationship between the beneficiaries (including the settlor’s widow) and the Protector (a close friend of the settlor) deteriorated when the Protector attempted to take an overly proactive approach following the retirement of the original trustee. Despite the insistence of the 14 adult beneficiaries, the Protector refused to stand down without a suitable replacement of her choosing. She further sought a blanket indemnity from the trust for any past liability arising from her actions as Protector, a matter regarding which the trust deed was silent. The trustee agreed with the beneficiaries that the trust was unworkable without a new Protector and so the beneficiaries applied to the Royal Court of Guernsey to remove the Protector.

Decision

In the absence of Guernsey authority on the matter, the court looked to other jurisdictions, such as the Jersey case of In the matter of the A Trust [2012] JRC169A, where it was held that the guiding principles for removing Protectors are akin to those applicable to the removal a trustee. The broad principle is that primacy must be given to the welfare of the beneficiaries and to the proper administration of the trust.

In this case, the court held that the Protector was not protecting the interests of the beneficiaries, her continuance would have been detrimental to the trust, and she was ordered to relinquish her position. In particular, the court noted how the Protector had taken on a role more akin to that of a trustee, including attending meetings with her own advisors and examining the trustee’s actions ‘with a fine-toothed comb’.  Further, the trustee was actually refraining from acting in the hopes that the Protector would retire. Ultimately, the court accepted that a ‘stalemate’ had arisen without any prospect of improvement, making the trust unworkable. However, the court was careful to note that mere hostility and animosity are not, alone, sufficient to found a removal of a Protector.

The court held that the Protector’s right to indemnity from the trust, in the absence of a term in the trust deed, depended on whether she acted in a fiduciary capacity. This is because persons, including third parties, acting as fiduciaries to a trust, have an implied equitable right to indemnity for expenses incurred in the discharge of their duties. Where a Protector provides a degree of oversight over the trust, their powers will be fiduciary rather than personal. In this case, the court declined to make any order to indemnify the Protector because such a blanket indemnity would be too wide. Rather, the court held that indemnities granted to third parties should be considered on a case-by-case basis having regard to the circumstances at the relevant time. 

Conclusion

These recent judgments demonstrate that the powers exercised by Protectors (or beneficiaries) when removing trustees are fiduciary in nature, and attract fiduciary duties. They reveal the general principles that apply to the removal and appointment of Protectors and trustees, and to fiduciary powers generally. Those appointing trustees and Protectors must be cognisant of their duties and of the fiduciary capacity in which they are acting, and must not overstep their powers lest the trust relationship becomes unworkable. Similarly, beneficiaries must understand their powers, and their limitations, with respect to disputes involving Protectors and trustees. 

 

Original article part of Sedgwick’s Offshore Professional Risks Newsletter of October 2016 and included here with permission from Sedgwick LLP

Share this page