Protector & Reserved Powers

The role of the protector in a trust

The protector is a governance figure that emerged in international trust practice to address a fundamental need: enabling the settlor to entrust a supervisory and control mechanism to a person of confidence, without exercising direct power over the trust themselves. The protector acts as a safeguard, ensuring that the trustee administers the trust in accordance with the settlor's intentions and in the interest of the beneficiaries.

The appointment of a protector is particularly relevant in irrevocable trusts, where the settlor permanently relinquishes the assets. The protector provides an additional layer of security and control without undermining the irrevocable character of the trust.

Typical powers of the protector

The protector's powers are defined in the trust deed and can vary considerably from one structure to another. Among the most common powers:

• Removal and replacement of the trustee: Power to remove the serving trustee and appoint a new one, without the need for court proceedings.
• Veto right: Power to block certain trustee decisions, such as distributions above a specified amount, investments in certain asset classes or changes to the investment policy.
• Amendment of the class of beneficiaries: Power to add or exclude beneficiaries from the class defined in the trust deed.
• Change of governing law: Power to change the governing law (proper law) of the trust or the jurisdiction of its administration (forum).
• Consent to distributions: Right to approve or refuse capital distributions proposed by the trustee.
• Appointment of a successor: Power to designate their own successor as protector.

Reserved powers of the settlor

Independently of the appointment of a protector, the settlor may reserve certain powers in the trust deed. These reserved powers allow the settlor to retain limited influence over the trust without undermining its validity or irrevocable character, subject to the governing law.

The powers most frequently reserved by the settlor include:

• Investment veto: The settlor may require that certain investment decisions receive their prior approval.
• Power to remove the trustee: The settlor may reserve the right to remove the trustee and appoint a replacement (without being able to appoint themselves).
• Right to receive information: The settlor may reserve the right to be informed of the composition of the trust estate and distributions made.
• Amendment of the letter of wishes: The settlor may update their letter of wishes at any time, thereby adapting their guidance to the trustee.

Balancing control and validity

Defining the protector's powers and the settlor's reserved powers requires particular care. An excess of powers reserved to the settlor may, in certain jurisdictions, lead tax authorities or courts to consider that the settlor has not effectively relinquished control of the assets, thereby undermining the benefits of the trust. Similarly, a protector with excessively broad powers may be reclassified as a co-trustee, with the fiduciary obligations that entails.

Our team supports you in defining an optimal balance between the powers of the trustee, the protector and the settlor, taking into account the governing law of the trust, tax considerations in the relevant jurisdictions and the settlor's specific objectives. We draw on our experience and knowledge of the practices accepted by courts and tax authorities to design robust and legally sound governance mechanisms.