A good feeling to be protected!
Asset Protection is still a demanding issue; wealthy people have. In setting up a trust or a foundation, settlors often miss appointing a protector. The bigger the trust, the more likely the problem. Where there is wealth, there is greed, and where there is greed, you'll find temptation and, of course, often misconduct.
Why a protector?
The idea behind the Protector is to have somebody who can monitor the Trustee, and who has the power to terminate the Trustee for any misconduct. Besides, the Protector is also acting in-between the Trustee and the Settlor and/or Beneficiaries. In summary, the Protector can be a wonderful and necessary addition to a Trust to safeguard it from Trustee misconduct. A Settlor should never be "penny wise and pound foolish" when it comes to preserving wealth.
Who should act as a protector
The Protector should usually not be related to the Settlor, Trustee, nor to any of the Beneficiaries. He should be an independent third party with advanced know-how of Trusts, Foundations, and the legislation of the jurisdiction of the Trust. An additional Co-Protector could also support the already appointed Protector with his knowledge and experience. But definitely, there is a need for an experienced Protector.
What powers does a protector have
With Protector provisions, simpler is better. A Protector provision should ideally have at least the following three powers:
1. Monitor the cashflow 2. To terminate the Trustee 3. The consent from the Protector for specific Trustee powersvs
NON-QUALIFIED PROTECTOR
Non-qualified Protector
- Has no or weak experience
- No or weak knowledge about Trusts/Foundations
- Not aware of his Duties and Powers
- Monitors rarely
- Less contact between Trustee/Foundation Council and Settlor/Founder
- No knowledge about the fees Trustee/Foundation Council is charging
- Mostly no juridical background
- Does not intervene in Trustee' s/Foundation Council's business
- Does not support Trustee/Foundation Council if needed
- Does not know AEoI or FATCA
- Barley knows Trust Deed/Articles
- No monitoring of financial or bank advisors
- No Reporting to Settlor/Founder
Qualified Protector
- Experienced
- immense know-how on Trusts/Foundations
- Knowledge on his Duties and Powers
- Monitors regularly
- Frequently in touch with Trustee/Foundation Council and Settlor/Founder
- Monitors Trustee/Foundation Council fees
- Juridical background
- Restraining Trustees/Foundation Council
- Supports Trustees/Foundation Council if needed
- Knowledge in AEoI and FATCA
- Experience on Trust Deed/Articles
- Monitoring of financial, banking and asset managers
- Reporting to Settlor/Founder and/or Beneficiaries
Story One
Many years ago, a representative of a beneficiary was involved in a case, where the Trustee was able to bill over $ 1 million in fees just for the trustee company representatives and its lawyers to sit idly by and watch litigation between beneficiaries that didn't materially affect the trust.
A protector should, in the first line, avoid any kind of litigation or fights between beneficiaries and trustees. However, a protector who would have monitored the fees and restrained the Trustee in advance, the trust could have saved a lot of money quickly.
Story Two
A client saved up all his money ($ 11million) during his life. Three years before she passed away, he set up a Trust naming his 3 children as discretionary beneficiaries. After his death, the Trustee invested parts of his wealth in very risky investments. All investments went bankrupt and were lost. His three children received distributions each of $ 750 thousand. After this incident, the trust ended as no assets were left anymore.
With a protector, such a high-risk investment could have been avoided, as this would never have been in the interest of the trust nor the settlor. The Trustee is still acting.
Story Three
The problem worsened by the fact that financial planners give so much discretion to trustees, and institutional trustees (trust companies) demand all sorts of releases from liability, etc., that make it nearly impossible for beneficiaries to do anything about a trustee that is on the trust teat and sucking it hard.