Third party power holders under trusts – types and use cases

A trust has traditionally been seen as a relationship only between settlor, trustee, and beneficiaries. However, modern trust relationships commonly import third parties who hold certain powers in relation to the trust.

Third parties can assist in the governance of the trust and the fulfilment of the settlor’s wishes. Holding trustees to account, managing conflicts of interest, and providing a connection between the trust and beneficiaries across generations are typical and desirable goals that a third party power holder can help achieve.

Third parties manifest themselves in trusts in several different forms

There are a range of different roles and powers that can be conferred onto a third party. As most of these roles are not defined in statute, the parameters of a third party’s role and powers are defined only by the extent to which the settlor can express his or her wishes in the trust deed (subject to the risk that the trust is deemed to be a sham or illusory).

These roles have the potential to overlap with each other and have various names. ?

• A third party with power to change trustees is typically known as an appointor.
• An advisory trustee provides advice to the responsible trustee.
• Special trust advisers are the reborn statutory creation of the advisory trustee.
• A custodian trustee holds trust property for the responsible trustee in an execution only role.

A protector is a third party with power to influence the administration of the trust

Perhaps the most commonly used name in a global context for a third party power holder under a trust is the protector. Although some of the functions and powers that a protector may exercise are similar or the same as that of an appointor, the role of protector is often broader. A protector is a person other than a trustee who has been given a power that assists in the administration of the trust. This is reflected in draft legislation in Jersey which defines a protector as a “person (other than a trustee, enforcer, or beneficiary) who holds a power, discretion or right in connection with a trust or in relation to trust property”.

The protector may be the settlor, a beneficiary of the trust, or an independent outsider. The protector’s role is not necessarily restricted to one individual; it may be a committee which fulfils the role by voting on proposed courses of action. Protectors are common in offshore trusts with remote, professional trustees.

Normally, the settlor determines who is appointed protector and how that role will affect the governance of the relevant trust. The archetypal protector in the offshore setting is a close relative or friend of the settlor whose task is to hold the trustee to account. If the settlor desires for the protector to take an active role in the day-to-day administration of the trust, then the protector may be a professional (e.g. a lawyer or trusted advisor). In contrast, where the settlor wishes for limited participation from the protector, then it may be appropriate for the protector to be a layperson.

The types of functions that a protector will perform under a trust differ from case to case, as the nature of the role depends on the terms of the trust deed. However, broadly speaking, the protector is most likely to play some form of supervisory role over the assets.

Settlor reserved powers enable the settlor to retain some control over the trust

Trust deeds can be drafted so that the settlor retains a degree of control over certain aspects of the administration of the trust. Typical examples include the settlor reserving the right to direct investments, having the ability to veto trustee decisions, and having the power to appoint or remove trustees. Sometimes these mechanisms are included in the trust deed in addition to protector provisions. More commonly, the settlor may be the protector for life.

Though a settlor may (in principle) reserve powers for themselves, the extent to which they choose to do so is the most significant issue. Without proper consideration of how these powers affect the trust assets and the administration of the trust, the legitimacy of a trust with extensive settlor reserved powers may be open to challenge.

There are many possible benefits to the use of third party power holders

Appointing a third party power holder under a trust deed can be beneficial. These benefits often, although not exclusively, relate to a settlor’s desire to maintain some degree of control over the administration of the trust, whether directly or indirectly.

Third party power holders may also be used for:

• Holding trustees to account.
• Ensuring the wishes of the settlor are ascertained and fulfilled.
• Managing conflicts of interest.
• Ensuring that specialist roles (such as investment) are carried out by competent and qualified professionals.
• Managing fiduciary risk arising from difficult fiduciary decisions.
• Managing deadlocks arising from trustees being unable to agree.
• Providing a connection to and voice for family members (especially down the generations).

Investment powers can be reserved to third parties to enable increased risk and/or expertise

The power to direct investments has traditionally been one of the most prevalent reserved powers in offshore jurisdictions. In circumstances where the settlor or protector is competent and qualified in the field of investment, it may be appropriate and even sensible for him or her to be involved in some capacity, either as investment manager or adviser.

Heritage assets such as farms can be dealt with by reserved powers

There may be circumstances where the asset in question is physically deteriorating, family sentiment has waned, or market conditions are such that it is no longer appropriate for the trustee to continue to hold the asset in question.

If a settlor was determined to prevent a forced divestment of a specific asset then a clause could be inserted in the trust deed expressly preventing the trustee from disposing of the defined asset (or at least not without the prior written consent of the settlor or protector).

Family businesses can be risky and difficult assets for trustees to hold on trusts

A trust is often established for the purpose of holding share capital in a private company carrying on business. In many cases the business is a family one and the objective of the settlor will be to provide an ordered succession of management and control when the patriarch or matriarch dies. The issues of diversification, settlor control and suitability as a trustee investment become relevant and the terms of the trust should address the unique circumstances, either in the recitals or the operative part.

Where circumstances allow, it may be appropriate for the trust to contain what are sometimes known as “Special Companies” provisions where the settlor or protector nominates a particular company wholly or partly owned by the trustee as being a “Special Company” in relation to which he or she may issue binding directions to the trustee to exercise, or refrain from exercising, voting rights in a particular manner.

ESG concepts can be safely imported into trusts through reserved powers

Third party power holders pose particular opportunities arising from the embrace of environmental, social, and governance (‘ESG’) concepts into trust arrangements.

A third party power holder who is an expert in ESG concepts, or other socio-cultural practices or creeds, could be well utilised in a contemporary trust relationship to ensure that the trust is administered in accordance with the expectations of the settlor on an ongoing basis. Such appointments would at the very least complement a trust deed which sets out how those higher principles are to be applied in dealing with trust assets. This would also enable the trustee to focus on traditional governance without the need to become an expert in a new area of law or cultural practice.

Conclusion

In my experience a well-chosen third party power holder and a well drafted trust deed can result in more disciplined fiduciary decision-making in trust governance.??