WHAT IS A TRUST PROTECTOR ?

One of the most important decisions a special needs trust’s settlor (the person who creates the trust and supplies the funds for the trust) makes is the choice of a trustee for the trust. A trustee typically manages the day-to-day operations of the trust, often making distributions to the trust’s beneficiary, investing the trust’s assets, and paying the trust’s bills. But how can the settlor make sure that the trustee will properly manage the trust when the settlor is no longer around to keep an eye on the trustee, especially if the trust’s beneficiary is not capable of supervising his own trustee? In many cases, a trust protector can ensure that a beneficiary is protected from trustee mismanagement.

Essentially, the protector is an intervener between the trustee and the beneficiary. The protector's job is to police the trustees, making sure that the trustee is properly performing his job. The trust protector typically has access to the trust’s accounts, trust’s transactions, and can compel a trustee to produce a summary of what he has done for the beneficiary. If a trust protector believes that the trustee is not properly performing his duties, he can usually fire the trustee. It is sometimes said that the powers of protectors are about retention of settlor influence, if not control; however, this is not entirely true, as the appointment of an independent professional protector can provide a genuine independent mechanism to oversee the administration of the trust. Therefore, the appointment of a protector can have a number of advantages, particularly in the area of disputes, where the protector can play an important role in working alongside the trustees and beneficiaries to facilitate any areas of disagreement and ensure a flow of communication and reporting between all parties involved. The role of the protector is essentially a hybrid role between being a defender of the interests of the beneficiaries and a facilitator or mediator where an independent third party is required.

Specific powers given to a protector include:

• monitoring and agreeing on the trustee's fees;
• carrying out periodic reviews of the administration of the trust;
• requiring an accounting or audit, with the power to nominate the auditors;
• being consulted or having veto powers before the trustee makes any discretionary payments to beneficiaries or objects of a power;
• being consulted or having veto powers over sales of particular shareholdings or other trust property;
• directing generally or in specific areas the exercise of trustee investments or other managerial discretions;
• withholding consent where required before a beneficiary can institute legal proceedings against the trustee;
• withholding consent to the trustee's proposed exercise of a power to amend the administrative or managerial powers of the trust; and
• removing and appointing trustees.

Nevertheless, whatever powers the protector is granted, it is not a trustee and must not be deemed to replace the trustee. Potentially, there is a greater risk of the trust being deemed to be a sham by the court where the protector has wide powers and there is a close relationship between the settlor and the protector, to the extent that it could be argued that the protector is no more than a puppet of the settlor and thus effectively in control of the trust at the settlor's direction. Therefore, such situations must be avoided when drafting the trust instrument in order not to have problems at a later stage.