Part 1: An introduction to the use of protectors

This article is part of a mini-series that explores the role of trust protectors.

It is worth noting as a starting point that there is no requirement to appoint a protector. It has been suggested that the concept has been more popular in relation to offshore trusts[1] because ‘by necessity settlors must be further removed due to many onshore tax laws (like the UK) deterring onshore settlors from acting as trustees of non-resident trusts, and therefore by default they can have more limited influence.’[2] In circumstances where the settlor elects to appoint a protector, it will generally be for one or more of the following reasons: (i) to retain a degree of control, with the settlor himself often being the first protector appointed; (ii) to involve someone who knows about the family’s business and/or dynamics in the running of the trust; and/or (iii) to monitor the activities of the trustee. Often, the protector will be the settlor himself, or else a close friend or trusted adviser of the settlor, although it does not always follow that the protector will have a close personal relationship with the settlor and the role can equally be carried out by a corporate fiduciary services provider.

The word “protector” rarely appears in Bermuda’s trusts legislation, yet the role of protector is well-known and much-used in Bermuda, as in other offshore jurisdictions. Section 2A(1) of the Trusts (Special Provisions) Act 1989 (“the 1989 Act”) provides for the ability of the settlor to reserve certain rights and powers to himself, or else to grant such rights and powers to another, without invalidating the trust. Whilst there is no mention of the term “protector”, it is clear that this would be captured by section 2A(1).

The 1989 Act does not automatically confer any statutory powers on a protector. Section 2A(2) provides a list of powers that may be granted without invalidating the trust, but it does not say that all protectors will have (or will be presumed to have) such powers. The protector’s powers in any given case will therefore be derived entirely from the trust instrument.[3] The rights and powers that may be reserved to the settlor or conferred on another (i.e. a protector) under the Act expressly include the power to amend or vary the trust instrument,[4] the power to add, remove or exclude beneficiaries,[5] the ‘power to appoint, add, remove or replace any trustee, protector, enforcer or any other office holder or any advisor including any investment advisor or any investment manager’,[6] and the ‘power to restrict the exercise of any powers, discretions or functions of a trustee by requiring that they shall only be exercisable with the consent, or at the direction of, any person specified in the trust instrument’.[7] It is this last power in particular that has been the subject of controversy in recent case law.

Although section 2A(6) of the 1989 Act expressly provides for powers to be granted to a third party (i.e. a protector) without imposing a fiduciary duty on that third party, in practice the protector is almost always a fiduciary who is obliged to act in good faith and in the best interests of the beneficiaries. Indeed, subsection (7) provides as follows:

‘In relation to any trust governed by the laws of Bermuda created after the commencement date of the Trusts (Special Provisions) Amendment Act 2014, in the absence of any contrary provision in the Trust –

•  in the case of the reservation by a settlor or the grant to a beneficiary of any of the powers specified in subsection (2), where so long as the holder of the power is not the sole trustee, such powers shall be personal and non-fiduciary; and
•  in any other case, such powers shall be fiduciary.’

[emphasis added]

This is consistent with the 1994 case of Von Knieriem v Bermuda Trust Company et al,[8]which considered the power of a protector to remove and appoint trustees some 20 years before the Trusts (Special Provisions) Amendment Act 2014 inserted s.2A into the 1989 Act and found that such power in the hands of a protector would usually be of a fiduciary nature.

It is worth noting that, although the powers of a protector are likely fiduciary in nature and therefore have to be exercised in the interests of the beneficiaries, the protectors do not have ‘a general power or duty to supervise the administration of the settlements, and they may only apply to the court for relief which relates to the proper exercise of their own powers’.[9]

This mini-series will focus on protectors as fiduciaries.

Further articles in this series

This article is part of a mini-series that explores the role of trust protectors. Other articles in the series include:

• Part 2: Protector consent provisions as they have been interpreted in recent case law;
• Part 3: An analysis of the arguments in favour of the wide and narrow view of protector consent provisions;
• Part 4: The possibility of drafting to remove any uncertainty; and
• Part 5: The consequences for the protector who oversteps his role.

 

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[1] Protectors have been a feature of offshore trusts for the last 40-50 years – see: In the matter of the X Trusts [2023] CA (Bda) 4 Civ at [129(iii)].

[2] Harney, P., and McCallum, M., (2022) The role of protectors: a UK perspective. Trusts & Trustees. 28 (9), 862-870, 863

[3] One of the most common powers given to a protector is the power to appoint and remove the trustees. It is also common to require the trustees to seek the protector’s consent before making certain decisions in relation to the trust, including in relation to the disposition of trust assets and the addition or removal of beneficiaries. Protectors may also be given powers to amend or vary the trust instrument, or else to veto the same. See: Pryke, S., (2010) Of protectors and enforcers. Trusts & Trustees. 16 (2), 64-72 at 65.

[4] Section 2A(2)(b)

[5] Section 2A(2)(g)

[6] Section 2A(2)(f). The reader will note the express reference to protectors in this provision. The role of protector is therefore recognized in Bermuda statute law. See also, for example: ss.13AA and 13B of the Trustee Act 1975.

[7] Section 2A(2)(i)

[8] [1994] Bda LR 50

[9] Davidson v Seelig [2016] WTLR 627 at [55].