Under Trust law, once the settlor has settled property on trust, he relinquishes any ownership rights on the trust property since the ownership would be transferred from the settlor to the trustee. The settlor would have limited control over the trust and its administration unless he reserves certain powers to himself on the trust deed. Nevertheless, even though the settlor might have certain reserved powers, he would still not be considered to have full control over the trust and ultimately the trustee's administration and decision-making powers.
The beneficiaries of a trust similarly have no control over the trust assets and how they are administered.
How can a settlor ensure that the purpose of the trust, and the settlor's vision, are retained?
Apart from the obvious - that is - appointing a qualified trustee of good repute licensed in a jurisdiction with high industry standards, in order to ensure one's property is in the best possible hands, it is customary, when setting up a trust, to have another person, usually someone the settlor trusts implicitly with his vision, to protect the beneficiaries' interests against any abuse or misconduct by the trustee.
Such an individual would be identified as the 'Protector' of the trust, a term common to many trust jurisdictions, including Malta.
In fact, Article 24A of the Trusts and Trustees Act (TTA), Chapter 331 of the Laws of Malta, states that "the terms of a trust may provide for the office of protector of the trust", making such an appointment optional, and in no way compulsory. The protector would create a system of checks and balances in relation to the trustee, to avoid abuse by the trustee of his role as administrator of the trust property, and generally speaking, ensuring that the settlor's vision for the trust is fulfilled.
It is always suggested to make sure that upon drafting the trust instrument, one caters for the possibility of appointing a protector, even though the settlor would still be undecided on whom to appoint. Apart from the initial protector's appointment, the drafters of the trust instrument can also cater for the subsequent or change in protector, the removal of the protector and the mechanisms to be followed in order to appoint another protector upon the protector's demise, resignation or incapacity.
Should a protector be appointed, then in accordance with Article 24A of the TTA, the protector shall have the following powers:
- To appoint a new and additional trustee;
- To remove a trustee; and/or
- To require a trustee to obtain his consent before exercising his discretion.
The first two powers are usually resorted to when the trustee in office is not performing his duties properly or has passed away or declared incapacitated (in case of a natural person being appointed as trustee) or when the trustee does not possess the right type of expertise to administer the trust.
The power to require a trustee to obtain the protector's consent before exercising his discretion in the administration of the trust property is very generic and can be tailored to the settlor's wishes, perhaps by adopting thresholds. It is quite common for the protector's consent to be required in one or more of the following instances:
- Any new investments to be made by the trustee;
- Any addition to the trust property by virtue of acquisition by the trustee;
- The appointment of investment advisors or other professionals required for the administration of the trust property;
- The distribution of income received by the trustee;
- The appointment or removal of beneficiaries (unless such power is reserved to the settlor or the trustee itself);
- The exclusion of any individual as beneficiary (often reserved to the settlor himself);
- The termination of the trust (often also a power granted to the beneficiaries or triggered by an event).
The above should not be construed as an exhaustive list as the protector's approval can be extended to other important trustee's discretionary powers or financial thresholds.
As it is not desirable for a settlor to retain a lot of control over the trustee (and consequently the trust property) in order for the trust's validity not to be undermined (or, worse still, considered a sham), appointing a person of trust as the protector of the trust allows for the settlor to have peace of mind without undermining the trust.
The office of the protector is the most effective mechanism that the settlor has over the administration of the trust property, however, it is not the only one. Indeed, the settlor may also retain discreet and indirect control over the trustee and the trust property through 'Letters of Wishes', addressed to the trustee, outlining the settlor's wishes from time to time. This document, as indicated by its name, would provide the trustee with the settlor's considerations on how the trust property should be administered, in the settlor's opinion. A Letter of Wishes is not binding on the trustee, as the latter may decide to disregard it if the contents of the Letter are deemed to be against public policy or in breach of the law.
As trusts are often used for estate and/or succession planning, any settlor should carefully consider the experience and qualifications of the trustee to be appointed to administer his estate, even if supported by a protector. The jurisdiction in which the trustee is established, and how strict or lax the licensing and regulatory regime in that jurisdiction is, should also be considered, to avoid being the victim of mismanagement (at best) and fraud (at worst). In Malta, trustees are licensed and regulated by the Malta Financial Services Authority.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.