01 Jan TRUST ADVISORY COMMITTEES – HAS THEIR TIME COME?
Two of the main conundrums faced by Settlors of international discretionary trusts are their choices of Trustee and Protector.
It is of course the norm for a Settlor to appoint a regulated trust service provider to be the corporate Trustee. The natural concerns of the Settlor about handing control of their wealth to a third-party Trustee can be addressed by establishing a Private Trust Company (PTC) to be the Trustee, but this mechanism does not appeal to all. Very often, therefore, Settlors opt instead to include Protector provisions in the trust instrument, including the need for the Protector’s prior consent to be obtained before certain key discretionary powers of the Trustee can be exercised, as well as granting to the Protector the power to appoint and remove the Trustee. The Protector role has often been filled by the Settlor’s trusted advisor (i.e. family lawyer), or by a trusted suitable relative or friend, resident in a tax jurisdiction where being the Protector will not potentially cause tax problems.
Since the global introduction (except in the US) of the OECD’s Common Reporting Standard since 2016, trust Protectors have discovered that they are disclosable as reportable persons by the Trustee under the relevant exchange of information provisions. Depending on where the Protector is resident for tax purposes, this can cause serious concerns for them.
Letters from their local tax authorities querying why the Protector has not previously reported the (e.g.) Cayman trust on their personal tax returns might be easy to explain in some countries by presenting clear evidence that they are neither the settlor nor a beneficiary or a Trustee of the said trust, but if the querying tax jurisdiction is not a jurisdiction which recognises or understands trusts, or if the tax authorities are particularly difficult or unfriendly, then this can be a very protracted and painful experience. A decision made as a favour to the settlor many years ago may well now be regretted by the now-reluctant Protector.
Another reason for the Protector now being reluctant to continue acting is the changing dynamics of the trust after the death of the Settlor which is very often the trigger for aggrieved beneficiaries to start fighting amongst themselves, which is all too familiar where children from different marriages are amongst the beneficiaries, or where an ex-spouse is challenging the validity of the trust. The family lawyer, relative or friend may well find themselves in the middle of the battle, wishing that they were not there. The relative as Protector may even find that his/her own children are in the crossfire, resulting in an unwelcome and uncomfortable conflict of interests if they need to take a particular position in the argument.
In this day and age, well-advised Settlors will usually have these factors pointed out to them by their advisors, and it is increasingly likely that the advice will be to appoint a specialist independent Protector, ideally resident in a tax-benign jurisdiction where the impact of the Protector being reported under the Common Reporting Standard is not a concern. However, that means that the Settlor would be appointing a Protector who he does not really know very well, and who does not yet have a full grasp of the family dynamics or the characteristics of the beneficiaries. That knowledge takes an investment of time to develop and build.
One ideal way to bridge the short-term knowledge gap, but with an ongoing role, is to create a Trust Advisory Committee. This could either be formalised within the trust instrument, or kept very informal via the letter of wishes, as preferred. If the Trust Advisory Committee is purely advisory, has no decision-making powers, and thus no fiduciary responsibilities, then the choice of who sits on that Committee is unlimited, and where they are tax-resident is irrelevant. By way of example, the Committee could consist of a suitable relative, the Settlor’s local lawyer and the Settlor’s international lawyer. The role could ideally suit the lawyers who have been involved with advising the family for many years, but who have either retired or are about to retire from their legal practice but wish to remain involved with the family. Successor provisions can be built in through appropriate drafting.
The key role of the Trust Advisory Committee will be to provide information and advice to the independent Trustee and independent Protector regarding the status of the beneficiaries to assist them with exercising the Trustee’s discretionary powers and the Protector’s consent powers. Is a beneficiary known to have a serious marital difficulty which could influence whether they might receive a substantial trust distribution at the current time? Or a substance abuse issue or serious illness? Maybe a gambling addiction? All such factors would be ones which the Trustee and Protector will wish to 1consider but are factors which can dilute the governance advantages which their independence otherwise contributes.
It appears that there is currently an increasing use of Trust Advisory Committees (sometimes referred to as Trust Steering Committees) in the international trust world, and in the opinion of the author it seems likely that this trend will continue to coincide with the increased use of specialist independent Protectors.
JANUARY 2024