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Settlors’ & Protectors’ Control Over Trust Assets


Settlors’ & Protectors’ Control Over Trust Assets

This blog examines the powers that settlors and protectors may wish to retain over assets vested in a trust. However, as most trust professionals are aware, the extensive transfer of powers to a settlor or a protector has a downside. To give substance to a trust, it is essential that the trustee is able to perform its fiduciary duties, honestly and in good faith for the benefit of the beneficiaries.

Settlement of the Conventional Trust

Creating a trust may involve a significant leap of faith for many settlors - in particular for those unfamiliar with trust law and concepts. Accordingly, many wish to retain a degree of control over the trust’s assets, whether by themselves or by their protector. However, settlors should be aware that this may undermine the trust significantly, potentially leaving the trust open to challenge by creditors and/or the relevant tax authorities.

Settlors’ Control

An essential element of a trust is the settlor’s intention to divest himself of the trust assets. Once a settlor settles certain assets in a trust, legal title over those assets moves from the settlor to the trustee. A trust will not be valid if it is not clear that the intention of the settlor is to create a trust.

It is therefore crucial that the trustee’s position as legal owner of the assets is not undermined by a settlor’s control over the assets. If the settlor is found to be in effective control of the trust assets, they may have to deal with significant adverse financial consequences. For example, a court could rule that the trust assets  be available to creditors of the settlor or be treated by family courts as assets of the settlor for the purpose of matrimonial finance proceedings.

Protectors’ Powers

The same concept may be applied to the protector in that the powers of a protector should not form a general mandate.

Where the protector’s control over the assets is so broad that it forms a general authority to administer trust assets in any manner and the trustee’s only obligation is owed to the protector, the court may give effect to that arrangement by ruling that the trust property is held on bare trust for the protector personally.

Conferral Of Powers

The trust may be prevented from taking effect if the conferral of powers on the protector goes so far as to completely obliterate the trustees’ obligation to deal with the trust assets on behalf of the beneficiaries. For example, if a trust deed forces the trustee to follow the instructions of the protector in the exercise of all his significant fiduciary duties and functions, including the exercise of their powers of investment and their dispositive discretions, the trustees would be left without any independent role in the administration of the trust assets.

If it is the case that these powers remain with the trustee, but consent by the protector must first be obtained for the trustee to be able to exercise any of his duties this may also be seen as an over reaching power on behalf of the protector, as effectively the trustee may not be able to implement powers on behalf of the beneficiaries when necessary. 

Again, a finding of this nature could give rise to adverse tax implications and the protector may be taxed on assets professedly settled on trust.

Integrity Of The Trust

Settlors should be aware that granting too many powers over the trust to those other than the trustee can threaten the integrity of the trust. Professional advice in the relevant jurisdictions and expert drafting is essential. The information in this blog is of a general nature and does not address the circumstances of any particular individual or trust.

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