In a discretionary trust, it is common to appoint a protector of the trust to provide the settlor of the trust with greater assurance that the trustee will conduct itself in a manner consistent with the settlor’s wishes. In this article, we provide high level guidance on the law relating to the office of protector of trust. If you would like specific information about setting up a discretionary trust or appointing a protector of a trust, please contact one of our trust lawyers.
In a discretionary trust, the settlor cedes control and ownership of assets to the trustee to hold on trust. In so doing, the settlor places his faith in the trustee to execute the trust as the settlor conceives. For many settlors, this leap of faith is disturbing and there is a frequent desire for settlors to retain a higher degree of control and influence over how the trustee discharges his duties under the trust deed. While the settlor may issue letters of wishes to provide guidance to the trustee over how he should discharge his duties, for some settlors, there is a lingering concern as to whether the trustee will in fact follow these wishes. As a result, it is not uncommon for a trust to be established with a protector of the trust.
A protector of a trust is an individual who is appointed under a trust deed to exercise certain powers in relation to the trust. Unlike the term “trustee”, the term “protector” is not a term of art. The law does not recognize particular duties and powers implicit in the role of a protector of a trust as it does in the case of a trustee. It is up to the trust deed to define the duties and powers of a protector.
Different trusts may provide for different duties and powers of a protector of a trust. Having said that, trust deeds which include a protector often empower the protector to remove and appoint trustees and to veto the exercise by the trustee of certain powers (i.e. certain powers of the trustees are only exercisable with the protector’s consent). Other common powers given to a protector include the power to add or remove a discretionary object and the power to revoke, alter or add to any provisions of the trust deed
Given that a protector of a trust may have significant influence over the trust, a question is whether the protector owes fiduciary or fiduciary like duties so that he must exercise his powers for a proper purpose. If so, the exercise by the protector of his powers may be subject to the court’s supervision. If not, the protector may exercise his powers in his own selfish interests.
Consistent with the absence of implied obligations for a protector, Hong Kong courts look to the trust deed itself to determine whether a protector owes fiduciary or fiduciary like duties. In construing the trust deed, the courts ask for whose benefit the powers of the protector have been given. In this regard, relevant considerations include whether the protector has other roles such as trustee, discretionary beneficiary or settlor, what powers are conferred on the protector and the overall effect of those powers individually and together.
Where the purpose and intention of the settlor was that the protector would be able to benefit under the trusts, the courts will find hold the protector owes no fiduciary obligations which would disable the protector from acting in his own interest.
One risk of appointing a protector of a trust and vesting wide powers in him is that it may increase the possibility of a court finding that the trust is not, in fact, a trust. For example, if a person who settles a discretionary family trust appoints himself as protector and is, in effect, able to prevent the trustees from distributing trust assets to anyone but himself, a court may find that the discretionary trust is not in fact a discretionary trust at all.
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