Protector not mandatory for trusts

Protectors can help ring-fence the working of the trustees and ensure the rules do not become rigid

Can someone entrusted to protect the well-being of your family unwittingly act against them, based on your instructions? Private trusts that are set up for the distribution of wealth to the next generation could face this situation if the structure is not carefully formed. Recently, there was a case where a trustee was accused of acting against the interests of the beneficiaries.
 
The beneficiaries in this case were a mother and child. They accused the trust of paying as monthly maintenance a lesser amount than what was decided by the settler, the father who is no more. The trust said it acted on the instructions of the protector, also appointed by the settler. The court has asked all the parties involved to settle the matter among themselves.
 
In India, the concept of a corporate trustee is slowly catching on as high net worth individuals (HNIs) prefer such a structure to pass on their wealth. A corporate trustee will be objective and less biased but one should ensure the trust structure is not too rigid. This is where a protector or a protector committee can play role. Of late, trust structures in India are also adding a protector to oversee the working of the trust. However, this is not mandatory according to trust laws.
 
“By the laws governing private trusts in India, a protector is not a must. A protector is a person appointed by the settlor to keep the trustee in place, in case the trustee does not do what is laid down in the trust deed,’’ says Neha Pathak, head of trust and estate planning at Motilal Oswal Private Wealth Management.
 
Having a combination of corporate trustee and a protector could ensure the right balance for the structure. The settlor can define the framework for the trust with the trustee and protector, ensuring the trust operates within the said framework, says Anuradha Shah, managing director and chief executive of Warmond Trustees.
 
It is equally important the structure allows flexibility to adapt to future changes. For instance, the guidelines laid down by the settlor for distribution of the trust corpus to the beneficiaries can be relooked at after 10-15 years, depending on inflation and family situation at that point. The new arrangement can be arrived at after consulting both beneficiaries and the protector.
 

“Questions for the settlor is who would manage the corpus or funds after him? Who would take the decision on investments, etc, especially if the beneficiary is a minor? In such a scenario, typically, the settlor would define an investment pattern for the trust to follow. Alternatively, if someone from the family understands finance and is reliable, then he/she can be the protector and decide how the investment will be done,’’ Shah explains.
 
Who can be a protector
 
There is no principle that stipulates who can or cannot be a trustee. It can be anyone known to the settlor and in whom the settlor has implicit faith. Typically, it can be some family member, like a brother or sister of the settlor. Or it can be a close family friend.
 
“The role of the protector truly commences on the demise of the settlor. Therefore, ideally, the protector should be someone younger than the settlor, who logically would outlive the settlor,’’ says Shah.
 
The role and authority of a protector really emanates from the trust deed. In some cases, the protector may have a restricted role. In others, the protector may have a wider scope. In case the beneficiary or the trustee feels the protector is overstepping his or her role, they may seek redressal in a court of law, she adds.
 
The protector should also not gain in any way from the trust, says Pathak. For instance, one of the mandatory rules could be that the trust should not invest the corpus in any company owned by the protector or in which the protector has any kind of share or interest.
 
Protector and trustee should work in sync
 
On the one hand, a corporate trustee brings experience and legal expertise. On the other hand, the protector, by virtue of being a part of the family, understands the family dynamics and can bring the emotional connect. This allows the structure flexibility adapt to itself to changing family situations.
 
For instance, the parent may have laid down pre-condition that the children should be handed over the funds at various stages during their lives. This could be to coincide with their graduation, securing a job, marriage and so on. But, the children might wish to start a business of their own and require some funds. In such a case, the trustee and the protector can discuss the matter at hand and release funds in favour of the beneficiary prior to the pre-stated timeline.
 
Or another instance could be if the children take to drugs or alcoholism, then the protector can ask the trustee not to release funds to the children, unless they go through a rehabilitation programme. Again, being a family member, it will be easier for the protector to ensure this. “It is also advisable to have more than one protector, as it will ensure a ring fence to the role of the protector. This is also advisable in case the protector falls ill or is unable to oversee the working of the trust,’’ says Pathak.
 
In case the beneficiaries are minors, Non-Resident Indians (NRIs) or are incapable of managing their own finances due to illness, etc, then a protector is extremely useful. “The idea is to structure the trust in a manner that the protector acts in a guidance capacity and the day-to-day execution of the trust entrusted to the corporate trustee. This will ensure that neither the trustee nor the individual loses sight of the objectives of the trust,’’ Shah adds.