A trust protector is a person appointed under the trust instrument to direct, guide or even restrain the trustees in relation to their administration of the trust.
The idea behind the protector is to have somebody who can watch over the trustees and terminate the trustee for any misconduct.
Historically the idea of a protector became more common with the advent of offshore trusts, which in turn led to greater powers to the protector including the firing and hiring of successor trustees.
Trusts, along with a protector now form part of the mainstream of tax planning in common law jurisdictions that recognize trusts.
The usual reasons for a settlor to utilize a protector are:
1. The settler wishes to grant or withhold certain powers from the trustees;
2. The settlor wishes a third party to act as a buffer between the settlor and the beneficiaries, and the beneficiaries and the trustees;
3. They allow a greater degree of flexibility when dealing with changes in circumstances, often in foreign jurisdictions, that might even include family disputes, deaths and divorce;
4. The settlor may be concerned that the trustee may not follow his wishes as required, and the protector can ensure this.
The typical powers vested in a protector can vary a great deal according to the intentions of the settlor in creating the trust document, but usually or often provide:
1. Power to approve investments;
2. Power to appoint replacement protectors;
3. Power to terminate the trust;
4. Power to appoint additional trustees or to remove and substitute trustees;
5. Powers to hire special advisors under certain circumstances when required.
6. Power to deal with changes in economic circumstances or tax laws, particularly in Dynasty trusts.
It must be pointed out that the more powers that the protector is given under the trust document the close of the protector comes to acting in a fiduciary capacity and being subject to the laws relating to same.
The concept of a trust is essentially simple- one person holds legal title to an asset for the benefit of another.
However because this concept has spread so greatly across the world over the past centuries, a situation now exists where major financial institutions hold billions of dollars in various forms of trusts, and since each trust there is a trustee who holds the assets, the concept of the protector of the trust became more prevalent.
The use of a protector of a trust would normally increase as the greater amount of the value of the trust increases.