Trust Protectors – Option or necessity?

Historically, the primary constituencies necessary for the formation of a valid trust were the settlor, being the person who in essence creates the trust, the trustee, being the person who holds and administers the property for the benefit of certain persons or classes of persons and finally, the beneficiaries, being the persons for whose benefit the trust has been created.  Within the contemporary legal landscape another figure has emerged, that of the protector whose appointment although not compulsory can have important repercussions for the administration of the trust.  In a nutshell the protector is someone appointed by the settlor for the purpose of supervising the trustees in the course of exercise of their duties and as the name suggests, the essence of their appointment is to “protect” the interests of the beneficiaries.

Cyprus legislation on trusts does not impose any restrictions on neither the appointment nor the powers of protectors, something which gives a great degree of flexibility to the settlors on the one hand to appoint whoever they trust on this position and on the other hand  to grant such person any powers, which under all circumstances should be explicitly provided in the trust deed.  The office of the protector should be assumed by someone who has the necessary qualifications and understands the workings of trusts.  Even the settlor and the beneficiary can be appointed to this position although it makes more sense for third parties or independent persons, even professionals, assuming such post. Practice has shown that the most common and important power granted to protectors is that of appointment and removal of trustees.  Other powers include consenting or vetoing decisions concerning the exercise of investment authorities, sale or distribution of assets or the estate, approving amendments to the trust deed for example on change of proper law and forum of administration and approving the addition or removal of beneficiaries or classes of beneficiaries.

In order to encapsulate the essence of the role of the protector we consider it helpful to make reference to the definition accorded under Cyprus legislation (and particularly the International Trusts Laws of 1992-2013 (69(I)/1992) as amended from time to time) (hereinafter the “Law”)  which reads as follows: “protector means a person other, than the trustee, to whom powers of whichever nature are assigned out of the instrument establishing or certifying the trust, including the power to advise the trustee with regards to the exercise of his powers or the right of the trustee to consent or veto and includes the power of appointment and removal of the trustee”.  From the definition it accrues (a) that the only restriction with regards to the persons who are able to hold the position of the protector is the exclusion in this respect of the trustee and (b) that there is no exhaustive list of the powers or duties of the protector, rendering even more important drafting of the trust deed where all these powers should be enlisted in detail and in a clear and unequivocal manner.  This is also evident from a reading of section 2A of the Law which provides that the powers and authorities granted thereunder to different persons, such as the protectors, firstly, are additional to the powers granted pursuant to the provisions of the trust deed and secondly, take effect provided that there is no contrary provision in the trust deed.

It is important to note that the classification of the nature of the protector’s obligations, being either personal or fiduciary, determines the extent of liability in case of breach.  It goes without saying that a direction towards a fiduciary nature of obligations sets the standard of behaviour even higher.  As it has already been mentioned there is no clear guidance on the matter in Cyprus, neither from legislation, nor from case law, meaning that recourse is sought from English authorities where it seems that there is tendency to regard at least the most important powers granted to protectors as being of a fiduciary nature.  For example English courts have held that the power of trustee appointment is one of a fiduciary nature irrespective of the person with whom such power is vested.

The flexibility provided under Cyprus law as far as protectors are concerned should not be used in such way so as to provide excessively general, wide or far-reaching power in the hands of protectors as it would in essence lead to an overlap between the role of the trustee and the role of the protector, with the protector being treated as co-trustee something that may have tax implications for the legal arrangement.  The role, not to mention in some cases the necessity of appointing a protector has arisen out of contemporary realities, in particular the likelihood of abuse of power by the trustee as a result of unfettered discretion however, it is an option that should be approached with caution and care so that the protector, if appointed, is able to fulfil their role on the one hand and so that a protector is not appointed merely for the sake of it.

Michael Damianos & Co LLC can provide advice and assistance on a wide array of issues concerning Cyprus International Trusts, including the appointment of protectors as well as drafting of specialised trust deed provisions.