22 April 2013

Withers leads on landmark case on trust protectors

A decision issued by The Royal Court of Jersey today provides new and much-needed clarity on the scope of a trust protector’s responsibilities, as well as casting doubt on a common practice in the trust industry.

The judgment in In the Matter of the A Trust that, as a matter of Jersey law, the considerations regarding removal of a protector apply in broadly the same manner as those for trustees. Simply put, whilst “not a jurisdiction to be exercised lightly,” a trustee or protector will be removed where its continuance in office “would be detrimental to the execution of the trusts”.

The case relates to two discretionary trusts which both appointed the same protector. After the settlors’ deaths, the relationship between the beneficiaries and the Protector “irretrievably broke down” and the “overwhelming majority” of the beneficiaries wanted the Protector to step down. The court suspended the Protector’s powers and ordered his removal from office.

The Royal Court held the Protector misunderstood his duties to his beneficiaries. The Protector’s rigid insistence on the trustees following the settlors’ wishes as he understood them, irrespective of the wishes and best interests of the overwhelming majority of the beneficiaries, was of particular concern to the Royal Court, who determined it was “clear that the root of the problem lay in [the Protector’s] misconceived view of himself as the living guardian and enforcer of the settlors’ wishes”.

The decision clarifies that a protector’s duty can be “no higher” than to see that trustees have “due regard” to the settlor’s wishes. The Protector’s misunderstanding of his role led him to play an “overactive part” in the management of the trusts and, at the same time, fail to “recognise the potential jeopardy to the trusts created by his over-zealous involvement”.

Dawn Goodman, a partner at international law firm Withers, and Fraser Robertson, a partner at Appleby Jersey, represented the beneficiaries. Andrew Holden, a member of XXIV Old Buildings and author of “Trust Protectors”, advised. Dawn comments:

We are very pleased with the Court’s decision. It is a triumph for common sense, not only in this case but more broadly in terms of defining the responsibilities of a trust protector. The judgment sets out helpful guidance on how protectors should discharge their duties – and when their actions may disqualify them from the position”.

Just as dangerous as the Protector’s over-zealous involvement, however, was his failure to keep a watchful eye on the Trustees’ management of the trusts. The Royal Court made specific reference to the Protector’s “readiness to allow the entirety of proceeds of liquidation of a substantial portfolio of investments to remain on deposit with a bank that was part of the same group as [the Trustees]” as an example of his improper conduct.

This point, while framed as an example of the Protector’s misconduct, is significant for the trust industry. The decision suggests that placing significant trust assets with a trustee’s sister bank may be inappropriate and may, as in this case, place the trust assets unnecessarily at risk. This is of vital importance to institutional trustees considering investing significant trust assets with their banking arms.

Dawn adds that_“The guidance set out in today’s judgment will be invaluable in situations where tensions surface between protector and beneficiaries. It is a sad fact of life that relationships that govern the formation of a trust do not always remain harmonious but the lessons from this case should help families, trustees and protectors understand each other’s positions better and avoid the need for drawn-out court battles”._

Ogier acted for the Trustees, whilst the Protector was represented by Carey Olsen.


Category: Firm News