Should clients use trust protectors?

Starting in the 1980s, people began using trust protectors, or guardians, for the administration of off-shore trusts.

But the use of protectors isn’t common in Canada, which is why our tax laws don’t currently address how they should be used, and what duties they should take on, says Sally Dennis, a partner at Farris Vaughan Wills Murphy LLP in Vancouver, and David Thompson, a tax lawyer at Thorsteinssons LLP in Vancouver.

Both experts presented yesterday at STEP Canada’s 17th annual national conference. They outlined the role of trust protectors, as well as the pros and cons of using them for domestic estate planning with clients.

Trust protectors can be individuals, advisory boards or professional firms. Their role is to watch over trustees to make sure no conflicts of interest arise, and to ensure trustees are always acting in the interests of beneficiaries. For example, they can be granted the power to change investments and to remove trustees, if required.

For more on how protectors are used and why, check out assistant editor Katie Keir’s live tweets below. To check out more of the tweets, click here.

Live tweets from Step Canada’s 17th annual national conference

My first session is about to begin! It’s about protectors in domestic ‪#estate planning, and features Sally Dennis, a lawyer from Vancouver.

Also presenting will be David Thompson, another TEP from Vancouver. They’ll comment on the role of protectors, and the potential pitfalls of using them.

A protector can be used if families are using discretionary trusts and they want to add features such as income splitting ‪@STEPSociety ‪#estateplanning

Or, if you’re dealing with multiple marriages, and if there’s a mix of Canadian and foreign family members in your clients’ families. Then, a protector can be good idea for family trusts ‪@STEPSociety

Common protector powers are the ability to change: investments or advisors; current ‪#trustees; and beneficiaries. They act as objective third parties, who monitor the trustees and make sure they are acting in interests of beneficiaries, trust.

Protectors are similar to/can be a board of advisors, says Dennis. This is seen mostly when family business in trust is in play ‪@STEPSociety

Protectors are often used when people have off-shore trusts, and they need someone to keep eye on far-away trustees ‪#tax ‪@STEPSociety

Other name for protector appointment is guardian. Dennis says protector isn’t “term of art,” and that protectors are different from trustee. They don’t hold the trust assets.

The protector isn’t always a fiduciary. Depends on the nature of his powers, and how he acts. Also, if he’s family or a professional ‪@STEPSociety

But using trust protector can also add extra administration, which can be frustrating for clients ‪#estateplanning ‪@STEPSociety

And, drawbacks of using protectors is costs of administering trusts can rise, esp. if trustee & protector are both professionals ‪#estateplanning

Still, having protector helps people retain control of assets and keep an eye on trustee(s). And, if no family member is qualified to be a trustee, family member can be protector.

If a protector’s acting in own interests, he should be held accountable, says Dennis. But there are few laws in Canada versus U.S. and international jurisdictions.

Use of protectors was mainly started in the 80s for off-shore assets, but wider use in U.S., U.K. in the 90s and today ‪@STEPSociety ‪#estateplanning

When naming protectors, remember to name contingent people, and to create succession plans. Little case law, so get help ‪@STEPSociety ‪#estateplanning

And, Dennis says to be wary of giving too much power to trust protectors. It could destabilize the structure, and undermine its purpose ‪#tax

Plus, consider drawbacks of appointing U.S.-resident trust protectors. Then, may need to comply with FATCA and U.S. tax rules ‪#dualcitizen ‪@STEPSociety