The evolving role of protectors: Legal rulings and responsibilities in trusts

Historically appointed to provide a form of oversight of trustees, protectors have played and continue to play a valuable role in family wealth governance, but important legal and practical considerations have evolved over the last few decades, especially recently, bringing new light and interest in the role. Steve, along with his fellow panellists, Elizabeth Kubanik (of Sullivan Cromwell) and Sophie Carr (of Withers), hosted an insightful, highly interactive, and engaging session bringing to light those developments.

Bringing a uniquely dual Jersey and US perspective, Steve kicked it off looking back and gave some historical context as to the origin of trust protectors, along with a brief history and outline of trust powers typically given to them (i.e. positive direction and/or consent/veto). He went further and outlined the existing statutory guidance in both the US and Jersey as to protectors and their legal obligations, including the related “wide/fiduciary” vs “narrow/personal” question relating to protector powers. It was clear that there is more statutory codification in place in many US states (e.g. Wyoming) versus that in Jersey which is largely silent on the matter, which the panel agreed is not uncommon given the different approach to trust and other statute drafting between those jurisdictions.

That statutory framework outlined by Steve then set the scene nicely for Sophie to summarise and elaborate upon recent important court decisions, which will likely have an effect on jurisdictions like Jersey, namely the Privy Council’s recent decision in A v C, an appeal from Bermuda, endorsed a wider default fiduciary role for protectors exercising consent powers, consistent with the approach taken in Jersey’s Piedmont decision. Elizabeth (Liz) then took the topic further, into a taxation context, and spoke to trust tax residency implications and the differences in that regard between the US and the UK for example, whilst also outlining a number of US tax-related common scenarios where protectors play a role, both in term of risk management but also in regard to cross-border planning opportunities.

Finally Steve was asked about his own experiences in relation the practical ‘real-life’ relationship between protectors, professional trustees and the families they support. Steve started off indicating that this relationship(s) requires careful balance, noting first that a protector’s connection with a family can and often does bring helpful insight for trustees and thus very useful in decision making, but challenges may arise including for example where they are, or are perceived to be, more closely aligned with one branch of the family. Clear responsibilities, independence of judgment and constructive communication are therefore central to an effective working relationship. There has also been the issue of protectors succession, which is often overlooked, both in the trust deed drafting and generally. Steve also referred to the increasing use of protector committees with clear rules/terms of reference as one way to help mitigate such issues. Going further, such committees often include younger members of the family (alongside more experienced advisors and/or family members) as one of way of bringing them along, albeit gradually, into the family’s wealth governance system, which in turn has shown to have other intangible benefits like increased trust and collaboration amongst the parties to the wealth structure and the family itself.

Steve then shifted focus to some more practical effect(s) of having protectors, specifically on trust administration. He noted that extensive protector consent requirements for example can slow down administration, while professional protector appointments often also introduce additional costs in the form of protector fees. Careful consideration of which decisions require protector involvement, and how that involvement operates (e.g. provision of what trust information and when, communication protocols and other), can help preserve effective oversight while supporting timely and reasonable decision-making. Finally, Steve also raised the question going forward as to trust information sharing with protectors, from various perspectives (e.g. demand, entitlement, type and timing), particularly in light of the seemingly higher legal standard for protectors.

All the panellists highlighted at different times the importance of considering and constructing protector appointments specifically within the relevant parameters of a family’s broader circumstances and governance framework – ‘no one size fits all’.

The panel concluded saying that they saw no sign of the use of trust protectors slowing down, but did share 3 thoughts as to the future of protectors: (1) the legal standard expected of protectors is getting higher, albeit differences in that regard appear to still exist between the US states and places like Jersey, (2) the precise use and make-up of protectors is getting more sophisticated in line with broader wealth governance trends in this space, and finally (3) recent developments may be a ‘warning shot’ for layperson ‘amateur’ protectors globally who, in many cases, may well not truly understand their legal obligations, and by extension, risks.