A cautionary tale on the role of the protector
The story of the X-trust is worth sharing. It started like any other story about a trust with a protector. The late settlor, Ms Goodness, with sound intentions appointed a protector to the discretionary trust that she settled. The protector, an accountant by profession that was well known to her, called Rudy, was an Australian resident. Ms Goodness did not have any children, and the beneficiaries of the trust as per the trust instrument were her nephews and nieces. Her desire for her nephews and nieces to benefit was also expressed in her letter of wishes that the trustee held on record.
Rudy held certain negative powers under the trust instrument, which meant that the trustee could only exercise certain powers by obtaining Rudy’s prior written consent. In particular, the trustee had to obtain Rudy’s consent to bring the trust period to an end, to distribute income or capital to the beneficiaries, to add beneficiaries, to change the proper law, and to invest the trust property. Rudy held one positive power as a trump card, namely that he could remove the incumbent trustee and appoint successor trustees. Perhaps it is fortunate that Rudy held no further powers of veto whereby he could direct the trustee to act in a certain way.
For many years, the trust was administered by the trustee without incident and all went well. The powers that Rudy held appeared appropriate and if anything should happen to Rudy, the trustee would still be able to administer the trust, as the deed contained appropriate provisions to cater for such a scenario (having appropriate fallback provisions and a thought-through succession plan are always important in relation to trust protectors). Rudy clearly did not hold too many powers to invalidate the trust or render it too cumbersome to properly administer. Further, Rudy could not be deemed to be a quasi-trustee (considering the powers that he held were mostly negative by nature), which could impact the tax residency of the trust. Rudy’s fees to act as the protector of the trust were reasonable. The trustee and the protector maintained a professional relationship. So far so good.
Despite many years of the status quo in terms of the trust’s administration, matters eventually became rather more complicated. The trustee received an original certified copy of the late settlor’s death certificate together with an original certified copy of a new letter of wishes, that the trustee had never seen before, purporting to supersede and replace the letter of wishes that the trustee held on record. In this new letter of wishes, the trustee was requested to remove the current beneficiaries and to appoint Rudy’s children as beneficiaries instead.
As any professional trustee would do, the trustee endeavoured to verify the authenticity of the letter of wishes, including consulting with a handwriting forensic expert – who unfortunately was unable to assist as they needed a substantial number of signature samples of the settlor to authenticate the new letter of wishes. The trustee was still not comfortable with the situation, and, adding to the discomfort, the protector started to exert pressure on the trustee to amend the beneficial class and distribute the assets from the trust. The trustee held several meetings with the protector to voice its concern and to attempt to agree on a way forward, but all was in vain. As expected, Rudy did not appreciate the trustee’s resolute position that it would not merely act on the new letter of wishes and consequently threatened to remove the trustee.
Thankfully, the settlor had been robust with her choice of trustee and had appointed a trustee that would do the right thing and not blindly follow the path of least resistance. Sensing the pending conflict with Rudy, and in response to his threats and demands, the trustee brought an application to the relevant Supreme Court. The Application requested an injunction to prevent the protector from removing it as trustee. Simultaneous to the injunction application, the trustee sought the Supreme Court’s direction on considering the contents of the new letter of wishes which purported to appoint Rudy’s children as beneficiaries as opposed to appoint the entirety of the income and capital of the trust fund to the existing beneficiaries of the X-trust in line with the trust deed and the existing letter of wishes. Finally, the trustee also requested that the Court remove the protector to allow for the good execution, administration, and enforcement of the X-trust.
After the injunction and directions application were duly issued and served on Rudy, through his lawyer, he advised the trustee that he no longer opposed the way in which the trustee wished to distribute the trust assets. He also agreed that the trustee did not have to appoint his children as beneficiaries.
Thankfully, this story has a happy ending and the trustee acted resolutely and in a manner that would be expected of a professional trustee. The beneficiaries were able to benefit from trust assets in the manner that their elderly aunt had intended rather than a manner attempted by a deviant protector. The distributions were so unexpected that one of the beneficiaries assumed that the trustee’s call was a prank and slammed down the phone in anger upon hearing that she will benefit from the trust. Once over the shock, the beneficiary conveyed her sincere thanks to the trustee.
So what can we learn from this almost unfortunate situation? If a settlor does decide that they wish to appoint a protector, then it is important to always ensure that the powers of the protector are appropriate. Ensure that the trust can be administered and decisions made if a successor protector is not immediately appointed, and ensure that appropriate and well-thought-out succession mechanisms are drafted into the trust deed. Always verify that there are not any adverse tax consequences to the protector’s appointment and the powers they may hold. Consider if the protector’s fees incurred are appropriate, and lastly and most importantly, select the right protector who can be relied upon and is known to the beneficiaries.
The X-trust arguably demonstrates that, if a trust has a robust professional trustee who is willing to make proper fiduciary decisions and act in the best interests of its beneficiaries, there is a reduced need for a protector, especially if the intended protector powers hinder and complicate a trustee’s ability to make decisions and administer a trust. A protector can never replace or erode the requirement to select a reputable and appropriate trustee, as Ms Goodness has done, to ensure that the best interests of the beneficiaries are served.
A version of this article was first published in the ThoughtLeaders4 Private Client Magazine, Issue 11, July 2023.
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