Should clients use trust protectors?

Trusts are tricky and intricately detailed—and the legislation governing them seems to change with each federal budget.

Given that, you may soon be answering questions about trust protectors, or guardians, who are typically appointed by settlors to supervise trustees.

A protector’s role is similar to that of a trustee, explains Sally Dennis, partner at Farris Vaughan Wills Murphy LLP in Vancouver. But, unlike trustees, protectors are not responsible for managing the assets held in a trust. Instead, protectors “can exert influence on the way a trust is administered and on the decision- making of trustees. The most common power [wielded by domestic] protectors is the ability to appoint, fire and replace trustees who aren’t fulfilling their duties or acting in the best interests of beneficiaries.”

Consider the example of Joe, a 75-year-old childless widower who lives in North Bay, Ont., who has been tasked with settling a trust. He asks a Toronto-based trust company to be his trustee; and since he can’t come to the city regularly, he also asks a friend’s daughter, who lives in Toronto and knows him well, to be the trust’s protector.

This Toronto protector monitors how the Toronto trust company administers the trust and, if Joe arranges it ahead of time, she will continue to monitor after Joe dies. If the trust company doesn’t take Joe’s wishes into account by following instructions in the trust indenture, then the protector can fire and replace the trustee.

Protectors can help manage domestic trusts, but they may not be right for all clients. We spoke to Dennis about the pros and cons of this type of appointment.

Q: What is a protector?

SD: A protector is an individual or group appointed by a trust settlor, the creator of a trust . A settlor can also take on the role of protector to maintain some control over the trust, if he isn’t acting as trustee [Editor’s note: The latter is most common with inter vivos trusts, which are active while a settlor or grantor is alive, as well as off-shore trusts.]

If a settlor also serves as protector, when [he] dies, a successor that he’s chosen will be able to carry on the role.

Q: In addition to appointing, firing and replacing trustees, what other duties can protectors have?

SD: Protectors can also be given the responsibility of ensuring the needs of beneficiaries are met via a veto power or consent requirement.

Say you’ve got a trust that holds a family business. The client may have appointed the trustees to be the ones running the business. But what’s right from a business perspective may not always align with what the family, and thus the settlor, had wanted. For instance, it may be best to sell part of the business but the family (i.e., beneficiaries) may disagree.

In that case, if the client had named a protector, and if that protector has a consent requirement, the protector could ensure all business decisions are made in line with the settlor’s values. That could lead to a veto situation whereby the protector would halt the decision-making process. So, the trustees and protector would have to resolve that conflict.

Further, if you’ve got a protector who’s well-versed in tax laws, it could be his job to monitor legislative changes. He’d inform trustees about how such changes could affect the trust and whether administrative alterations needed to be made.

Q: When can problems arise?

SD: Sometimes people wonder why the protector wasn’t appointed as trustee in the first place, and that’s a natural question if people don’t understand the nuances of the protector role. Protectors take on a role of influence in the decision making of trustees. So when choosing a protector, you need to be clear in the trust indenture on how the protector’s role compares to the trustee’s.

Ensure protectors remain accountable

When creating a trust indenture, be clear about the protector’s role, and detail how he’s expected to work with trustees and beneficiaries.

Sally Dennis, partner at Farris Vaughan Wills Murphy LLP, suggests adding these three provisions.

• Outline whether a protector has a proactive role or reactive role when it comes to acting on behalf of beneficiaries.
• Provide an escape hatch for trustees and beneficiaries, in case they find they’re dealing with an unco-operative protector (e.g., one who’s refusing to find a solution to a dispute about a family trust). She says, “A trust indenture could say that if trustees don’t get consent from a protector within 30 days of making a request, for example, then that protector’s consent isn’t required.”
• Include a provision that says beneficiaries that become of age have the power to remove a protector, if the protector is primarily there to help them.

Also, if a protector must be consulted before decisions are made and the trust indenture doesn’t prescribe how to remove and replace unco-operative protectors, there could be problems (see “Ensure protectors remain accountable,” this page).

Q: How do you choose the right protector?

SD: Start by thinking about whether clients even need trust protectors, especially if the goal is to avoid extra bureaucracy and cut down on the expense of creating a trust. Then, before appointing a protector, the settlor should ask if the person she’s appointing understands what his job will be and whether he’s comfortable with the position. She should explain whether he’ll have a proactive or reactive role. For instance, will he need to review investment statements and supervise trustees to make sure they’re doing a good job, or will he wait for beneficiaries to complain to act?

Often, protectors will know the settlor’s wishes, so they’re useful if you want someone to help advise trustees and supervise their activities. Going forward, we may start to see more protectors of commercial business trusts.

Or, if a client has property in a different jurisdiction or province and they place that property in a trust, a practical solution may be to appoint a protector who lives in the same jurisdiction as the property and trust, especially if the trustees don’t live there. In that example, the protector could have the basic role of checking out the property and making sure trustees are looking after it.

Q: Whom should a settlor choose?

SD: When dealing with a trust that holds a family business, choose a senior family member who understands the business and needs of the family. Or, if deciding between appointing a professional or family member, you need to consider the skills required to carry out the role of protector. You might choose a tax advisor or trust company if the trust structure is complex. If a client chooses a tax professional or trust company, he’ll have to pay, which he likely wouldn’t have to do when choosing family members. Those parties may either charge hourly or use a fee-for-service model. And, protectors should track their time and give statements of fees to trustees. This procedure should be set out in trust indentures. An advisory board as protector can also work. If a trust needs to be [modified] in response to changing tax laws, for instance, you may need more than one person if you want the protector to supervise this. You also might need a domestic and international tax expert. [But] you may have a trust that’s completely unworkable if you have too many people involved.