Cayman Islands Role of the Trust Protector

Transcription

1 Cayman Islands Role of the Trust Protector What is a protector? Many trusts are now established which contain provisions appointing a protector. The office of protector has no statutory background and a protector derives his role and responsibility entirely from the terms of the instrument creating his position. This will contain provisions setting out what the responsibilities of the protector are and the powers given to him to perform those responsibilities. Why a protector? While there are many reasons for the creation of the office of a protector within a trust deed, perhaps the most common is the natural reluctance of settlors to actually part with control of their property. Usually they are advised to establish a trust by their professional advisers. The reasons for that advice would be many and could include making provision to protect their families, or avoid taxation or at least to defer it. Additionally, the trust may be established in order to preserve property against the ravages of the settlor's creditors the type of trust known as an asset protection trust. In all cases, however, the settlor probably does not really want to part with the property in the first place. He recognises the need to do so and the benefits to be derived from doing so but feels a natural antipathy to the idea of passing control of his assets to trustees about whom he knows very little. Although, his advisers are likely to have pointed out to the settlor the wisdom of parting with as much control as possible to ensure that the trust is properly established and cannot be considered to be a sham, he will find that hard to do. He will want to exercise some form of control over the trustees and the appointment of a protector may seem to him to be the ideal solution. Whom is he protecting? The first question to be asked is "Whom is the protector protecting?" The answer largely depends upon the responsibility given to the protector by the deed but in most cases he will be protecting the interests of the beneficiaries of the settlement. In principle, however, his role may range far wider than that and he may be asked to step into the shoes of the settlor (particularly in the case of asset protection trusts) free ranging authority to act as he thinks fit in any circumstance without necessarily considering the interests of the beneficiaries. However, as discussed below, he is unlikely to be able to ignore the beneficiaries totally. History of the protector To understand the origin of the position of a protector, it is helpful to look back at the history of trusts themselves. Trusts date back to the medieval times and were particularly popular at the time of the Crusades. When a Baron intended to go to the Holy Land to fight, he was obviously concerned to ensure that his property would be preserved in his absence so that he could enjoy it upon his return. He would, therefore, convey the legal title of property to a trusted friend in trust for the benefit of himself and his family before his departure. He hoped and expected that his friend would defend his property and his family. Sometimes, however, his trust was misplaced and

2 Page 2 thus arose principles of equity which have now developed into the modern Law of Trusts. It will be seen that the original role of the trustee was simply to act as a protector to protect the property and indeed that remained the primary responsibility of trustees throughout the following centuries. Trusts were generally established to protect family interests and trustees were usually senior family members who could be relied upon to do the proper thing, or professionals who could equally be relied upon to act properly as they were being paid to do so. Such protection as was necessary was usually left to the Courts of Chancery who could be relied upon to come down heavily on trustees who stepped out of line. With the advent of increasingly complicated taxation legislation in the twentieth century, however, old-fashioned trusts assumed a new life and became used as a tax planning vehicle. In addition, a body of professional trustees grew up who were willing to act as trustees for anybody subject to suitable reward. Thus the trustees ceased to be trusted family friends or professional advisers, but were rather strangers to the family. Settlors felt the increasing need to exercise control over those trustees and thus the office of protector was born. An additional reason was the increasing cost of litigating disputes through the courts. The presence of an individual who could exert some pressure on trustees or remove unscrupulous trustees could often avoid the necessity for expensive litigation. The protector seemed ideally situated to fulfil that function. Who should be a protector? Most settlors are likely to suggest that they should act as protector to the trust. This is often very acceptable but this will depend upon fiscal and other considerations and upon the responsibilities which the protector is to undertake. However, there are a number of disadvantages in having the settlor act. Firstly, settlors are not immortal and the likelihood is that a trust will last longer than they do. Provision does need to be made for succession to the settlor in his role as protector, although, it is not uncommon to find that settlors really have no further interest in the property once they have themselves passed on. From an asset protection perspective the settlor is not usually the wisest choice. It should be borne in mind that the powers reserved to a protector may well be exercisable by his trustee in bankruptcy. If one of the objects of the trust is the preservation of property from creditors, it is clearly inappropriate for the settlor's trustee in bankruptcy to have a power to appoint the trust property to himself. An alternative to the settlor is for a trusted friend to be suitable for the role. While being independent of the settlor and not within the control of the settlor's trustee in bankruptcy, he can usually be relied upon by the settlor to act as he would himself have done. His independence is often assured by the fact that he has no interest in the trust fund itself. Again, however, he will suffer the same mortality disadvantage as the settlor and the succession to him in his role as a protector always will cause problems. In addition both he and his successors may lose touch with the original family for whose benefit the trust was established. He may even quarrel with them or simply lose interest in performing an onerous task for which he receives little thanks and probably no remuneration. Equally, however skilled he may be at his own trade or business profession, he may not be able to bring to the office of the protector the impartiality and judgement which that role calls for. Consequently, perhaps the most common kind of appointee is a professional adviser of the settlor. He will frequently choose his lawyers or bankers or other professional advisers to act as the protector. In this way the succession is much more likely to be assured. In due course the individual initially appointed will be replaced by his successor within the firm or organisation which employs him. He will be absolutely independent both of the settlor and of any interest in the trust property. He will not usually be a beneficiary of the trust and will be able to act impartially. He will certainly be able to bring to the office his professional skills. He may perhaps be more inclined to take a continuing interest in the management and administration of the trust fund; since he is being paid for doing so. Finally, there is in the Cayman Islands a company which exists solely to act as a professional protector and offers its services on a purely professional basis. Selection of a protector To summarise, in selecting a protector the following are factors for consideration:

3 Page 3 1. Is independence necessary to enable the protector to perform his role? This will largely depend upon fiscal considerations but particularly in the case of asset protection trusts, there will be a need to consider any Creditor Protection Laws of the settlor's jurisdiction. Is it dangerous to appoint the settlor as protector? Is it dangerous to appoint someone else within that jurisdiction as protector? Local counsel should be consulted in those jurisdictions before determining how to proceed. 2. A second consideration would be the need to have adequate provision for succession of protector and to ensure that the protector retains a continuing interest in acting. There is little point in appointing a protector unless he can be relied upon to perform his function diligently. 3. The person appointed as protector should be likely to have skills which he will need to enable him to perform his role as protector. 4. It may be advisable to appoint a protector who is resident or domiciled in a jurisdiction different from that of the settlor's domicile or residence and also from the domicile or residence of the trust itself. Where the protector needs to act to remove a trust from a jurisdiction, he should be free from any influences in that jurisdiction which might inhibit him from acting. What can the protector do? What the protector can do will depend on what he is allowed to do in the terms of the trust deed itself. The primary role of the protector is to monitor the activities of the trustee and act as watchdog over him. In order to perform that role he may be required to consent to the exercise of certain of the powers given to the trustee; for example, he may be required to consent to investment of the trust fund by the trustees or to the appointment of trust property to beneficiaries. Where trust property is settled on discretionary trusts the settlor may have indicated to the trustees what his wishes are in relation to those discretions. The protector may be called upon to ensure that the intentions or wishes of the settlor are complied with. Another role is the review of the trustees' accounts. There is an obligation in equity for the trustees to be ready to account for their dealings in the trust property to the beneficiaries. This can pose difficulties where discretionary trusts are involved and there is a large class of discretionary objects. There is indeed a question as to whether those objects are entitled to any accounting, although, there is Irish authority to say that they are and indeed it would seem inequitable that the trustees would be accountable to no-one for their dealings in the property held for the benefit of those objects. A possible solution would be to oblige the trustee to give an account of his dealings with the property to the protector who can review and approve them on behalf of the discretionary objects. This may not be an absolute answer to a request for accounting from discretionary objects; that question remains to be determined by the courts. It is, however, a half-way house which the courts may find acceptable. The protector can have power to approve the remuneration of trustees. He may be called upon from time to time to agree a scale of fees in terms of which trustees are to be remunerated and to verify that the fees charged by the trustees have been properly earned in accordance with that scale. The protector may be given the power to remove and appoint trustees. This is of course the ultimate sanction. If the trustee is acting contrary to the wishes of the protector, he can if he thinks proper, remove the present trustee and appoint a more compliant trustee in his place. Such a power will also ensure the proper succession of trustees in the ordinary course when a trustee desires to retire. However, the protector's most significant use of the power will be to remove trustees whom he believes to be incompetent or, worse still, dishonest. The protector may also be called upon to monitor the jurisdiction where the trust is located. While the settlor will no doubt have taken adequate advice and selected the jurisdiction which he believes to be suitable at the establishment of the trust, changes may well take place. The jurisdiction may be subject to political upheaval; its Government may

4 Page 4 decide to impose taxation or exchange control which will no longer make it an attractive jurisdiction to operate the trust from; it may simply be that the family interests are no longer in the region where the trust is presently administered and could be more conveniently administered elsewhere. A power is frequently given to the protector to allow him to select a new jurisdiction for the administration of the trust and the consequential power is often given to change the proper law of the trust to the laws of the jurisdiction. Such a power may be stated to be exercisable only in emergency situations or could be generally given. As mentioned before, it would be advisable if the protector was not subject to any influence or bias in favour of the original jurisdiction so that he could perform this role satisfactorily. Another power frequently given to protectors is the power to add and remove discretionary objects from the class of beneficiaries of a discretionary trust. This increases the flexibility of the class. The protector may be asked to go further and actually direct the distribution of the assets of the trust fund as he thinks fit among the beneficiaries. Such a power could extend to a distribution to the protector himself if allowed by the terms of the power. In addition, the protector may be given power to direct the investment of the trust fund. His expertise may be in this field and the settlor may have more confidence in the ability of the protector to successfully invest the fund than the trustees. In addition, his knowledge and insight into the family affairs or the intentions of the settlor may be very helpful to him in directing the investment of the trust fund for the benefit of the beneficiaries. The protector may be given power to terminate the trust altogether. Trusts are generally established with the scope to lasting for a considerable length of time. However, it may well be that their initial usefulness will not survive the life of the trust. If the protector is given the power to terminate, the property can be distributed in terms of the original trust or re-settled on fresh trusts more appropriate to the circumstances at that time. There are probably many other powers which can be given to the protector, but the foregoing are the most commonly used and frequently found in trust deeds. Not all of them will be utilised in every trust. The powers which the protector has will depend upon what the original settlor sees as the role of the protector. Responsibilities of the protector It has been seen that a protector can be given a whole raft of powers by the trust deed. The protector will need to know and consider whether or not he is answerable in the exercise of those powers and to whom he is answerable. The answers to those questions depend upon whether the powers he holds are exercisable by him in a fiduciary capacity. If any power is not, it is considered to be a bare power, which is simply a power given to somebody who has no interest in the property over which the power can be exercised and which he does not hold for the benefit of any particular person or group of person. The donee of that power cannot be compelled to exercise it at all. However, it is unlikely that powers held by the protector will be simply bare powers. The powers given to him as protector will be given to him by virtue of his office as protector and thus will probably be fiduciary in nature. Fiduciary powers carry with them responsibility to the persons for whose benefit the powers are to be exercised, normally in this case the beneficiaries of the trust. The general rule is that the holder of a fiduciary power must act honestly in what he alone considers to be the interest of the objects of the power. It should be noted that honesty or good faith is the standard applicable to fiduciaries. Further, he alone must reach the conclusion that the exercise of the power is desirable. While he can consult with all interested parties, the beneficiaries of the trust, the objects of the power, the trustee, the settlor or anyone else he can think of, the responsibility will remain his alone. He must act, if he acts at all, in what he considers to be the interest of the objects of his power. That will probably mean the interests of the objects as a whole and not of any particular beneficiary. However, a power of appointment is often expressed to be exercisable to benefit one or more of the objects, the beneficiaries of the trust, to the exclusion of others and without any precept of equality. The protector given such a power is able to exercise the power in precisely that way and there will be no need to benefit

5 Page 5 all beneficiaries, monetarily or otherwise. What is important is that in considering whether or not to exercise the power, the donee of the power must look at all the objects' interests even if in exercising the power he ultimately decides to benefit only some of them. In addition to acting honestly, the protector must exercise such skill and expertise as he has. Case law has suggested that a higher standard of care will be expected of professional trustees than would be the case for lay trustees. It is likely the same would be true of professional protectors or professional persons acting as protectors. Actions and omissions may be excusable in someone who acts out of a sense of loyalty or family friendship but will not necessarily be excusable in someone who acts totally for reward. The general rule can be broken down into several duties: 1. The protector will be under a duty to consider whether any discretionary power should be exercised at all. The exercise of the power may not be mandatory. Nevertheless, he should from time to time consider whether it is appropriate that he now exercise the powers given to him. Where he does so and reasonably forms the conclusion that there is no occasion for him to exercise the power, the courts will not interfere. However, if a protector simply does nothing at all, the courts will act to compel consideration by the protector of exercise of the power; indeed, the courts have in the past taken to themselves the exercise of the power itself, but this would be exceptional. 2. The protector is under a duty not to fetter his discretion. In other words he must not enter into any agreement to exercise his discretion in a particular way in the future. 3. A protector is under a duty not to delegate the exercise of his discretion to anyone. Discretions are vested in the protector personally and must be exercised by him personally. That is not to say that the protector must do absolutely everything himself. Although, the protector may delegate the ministerial or administrative performance of actions resulting from an exercise of his discretion, the discretion itself remains his alone. 4. The protector is under a duty not to act under another's direction. He must be independent. He must not enter into any form of understanding with, for example, the settlor that he will only act in accordance of the settlor's wishes. 5. The protector is under a general duty not to act for his own benefit or for the benefit of any party other than those objects of the power. That may be qualified by the terms of the power which not infrequently, in the case of a power of appointment to beneficiaries, will permit the protector to appoint property to himself. The protector's primary duty is to act in the interests of the objects of the power. 6. The protector is under a duty to treat the objects of the power fairly and where appropriate equally. He must give consideration to all of their interests, and if those interests are equal, he must exercise the power equally. This does not prevent a power of appointment of trust property to be exercised to make payments to some beneficiaries but not others, provided the power itself authorises inequality. Essentially the protector has a duty not to act in a discriminatory fashion. The donee must treat the beneficiaries of his power fairly. What amounts to fair treatment is particularly difficult to ascertain and each set of circumstance will have to be considered on its own merit. What must be understood, however, is that a fair decision may prejudice some beneficiaries while delighting others. 7. The protector is under a duty not to act capriciously or unreasonably. These terms are not easily defined. The courts in general are reluctant to interfere with mere errors of judgement and will require overwhelming evidence of unreasonableness or capriciousness before they will act. Essentially, particularly where the discretion given to the donee of the power is expressed to be absolute or in similar terms, the

6 Page 6 courts will only interfere if it can be established that the power was exercised in bad faith or in a totally unreasonable manner. It should be noted that in exercising a power, the protector will have to comply strictly with any requirements in the deed establishing the power as to formalities to be followed. Also, in exercising a power, the donee may not exceed the scope of the power. The power only allows the protector to do what is specifically stated within its own terms or what may reasonably be implied from those terms. Anything else is beyond its scope and his ability. However, if the protector exercises the power in such a way that part of it may be good but part exceeds the scope of the power, the appointment may be nevertheless good to the extent that was within the scope of the power. As stated above, a donee of a power must exercise it in good faith for the end designed for the power; otherwise the execution of the power is a fraud on the power and void. Fraud does not imply any moral turpitude; it merely covers all cases in which the purpose of the appointment is to effect some object beyond the purpose and intent of the power. For example, an appointment may be fraudulent and void if made with a corrupt purpose. The normal example given would be the exercise of a power of appointment in favour of an object who was terminally ill and who had named the donee of the power as the beneficiary under his Will. If the intention of the donee in exercising the power was to procure that, by the exercise of the power, the property would come to himself upon the death of the object, the exercise would be void. Similarly, if an exercise of a power, on the face of it within the scope of the power, is done with the purpose of achieving a result contrary to the terms of the trust deed itself, it would also be a fraud on the power and void. An example might be a power to appoint trust property to a beneficiary. If the protector wishes to exercise his power of appointment in favour of an object of the power but on the understanding that the recipient would immediately pay the money to a third party not entitled to benefit under the power, such an exercise of the power would be a fraud on the power and void. Exculpation Finally, the protector will obviously be concerned about his ability to protect himself against the consequences of his own actions and it will be usual to find within the trust deed itself exculpatory language which will attempt to address those concerns. Frequently, the language will be couched in terms that the protector will incur no liability for actions taken by him in that capacity. It may also provide a right to indemnity out of the trust fund for any loss incurred by the protector in performing his duties as such. It will usually be qualified to limit the protection given only to those actions where the protector is acting honestly. The extent to which such a release or indemnity can serve to protect a protector from consequences of his own negligence is by no means clear. Certainly what is clear is that any such attempt in the trust deed would be very strictly construed and the conduct which the protector is seeking release from or indemnity against would have to fall squarely within the terms of the release or indemnity language. Nevertheless, there have been indications recently by courts that the ability to obtain any such release or indemnity would be limited. Certainly no release or indemnity could ever be given against the consequences of the protector's own fraud. Even wrongful conduct not amounting to fraud but done consciously or deliberately by the protector may be incapable of release or indemnification. In a nutshell, the principle is that with fiduciary powers come fiduciary responsibilities and while the terms of the power may to some extent limit that responsibility and insulate the protector from liability incurred as a result, they can never totally exclude it. Actions taken in good faith but are the result of an error of judgement could be the subject of exoneration but extreme caution should be taken in relying on any such provision. Updated: 14 August 2015

7 Page 7 For further information please refer to your usual contact or: Cayman Islands - Andrew Miller, Partner andrew.miller@walkersglobal.com The information contained in this memorandum is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter. Walkers works in exclusive association with Taylors in Bermuda, a full service commercial law firm providing advice on all aspects of Bermuda law.