A “protector” is a person who is given special rights and powers under a will or a trust instrument to participate in the administration of an estate or a trust. Protectors generally provide an oversight function–they ensure the trustees are administering the trust in accordance with the testator’s or settlor’s intentions and they also safeguard the interests of the beneficiaries.
The use of protectors first gained popularity in offshore jurisdictions in the 1970s. They were brought about by onshore settlors of trusts who did not want to transfer complete control over their assets to unknown offshore trustees–for various tax and non-tax reasons, the purpose of such trust planning would often be defeated if the settlor was appointed as a trustee or if he or she retained certain powers under the trust instrument. The role of protector was created to alleviate settlors’ concerns. The persons appointed as protectors–generally trusted advisors, friends, and family members–would often serve as a link between the settlor and the offshore trustees who are typically unfamiliar with the settlor and the relevant family dynamics.
While the use of protectors is a recent development, conferring rights and powers on non-trustees in trusts and wills is not new. The main difference, though, is that the powers conferred on protectors are generally much broader. Powers may include the ability to remove trustees and appoint replacement trustees, add and remove beneficiaries, direct certain investments be made, and veto distributions to beneficiaries. Protectors, though, may also play a more passive role and may only have a right to request information from the trustees or to consent to a narrow range of trustee decisions. In each case, the trust instrument generally defines the role of the protector.
Another difference is that protectors are generally considered officeholders. Powers and rights are conferred on them in their capacity as protectors, and not personally, which allows the transfer of such powers and rights to alternate protectors (as opposed to being extinguished on death).
In Canada, protectors are seldom used in domestic trusts. In some cases, though, they may be useful. For example, if the settlor wishes to maintain a degree of control over a trust but it may not be appropriate for the settlor to act as a trustee, such as a trust established for asset protection purposes, the role of protector may be of assistance. Protectors may also be useful where the settlor is concerned about the investment knowledge of the trustees, but does not wish to appoint persons with financial management experience (perhaps due to cost). Persons with financial management experience could be appointed as protectors in such circumstances. As well, protectors may be useful where a multi-generational discretionary trust is settled. In such cases, protectors could be appointed for the purpose of resolving any disputes between the trustees and beneficiaries over discretionary distributions, which may help avoid expensive litigation, and for the purpose of controlling the succession of trustees by vesting appointment powers in the protectors.
The law regarding protectors is underdeveloped in Canada–there is very little case law, and no legislation, governing protectors. This creates a few uncertainties and problems, some of which though can be dealt with by careful drafting. For instance, the trust instrument should include provisions dealing with the appointment, removal, and retirement of protectors, and should set out their duties and powers.
The use of protectors can often be avoided by ensuring the most appropriate people for the role of trustee are appointed. They should still, however, be considered during the trust planning process as they can serve a very useful purpose in appropriate cases.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.