News

The long-awaited decision of the Privy Council in the matter of X Trusts (Re The X Trusts [2021] SC (Bda) 72 Civ) has provided welcome guidance on a significant and often debated issue in modern trust administration: what is the proper role of a protector when exercising powers of consent?

Protectors have become a familiar feature of offshore and international trust structures, yet the extent of their authority has often remained uncertain. The Privy Council’s judgment offers much-needed clarity, confirming that, unless the trust instrument expressly provides otherwise, a protector who is required to consent to the exercise of a trustee power is generally expected to exercise independent fiduciary discretion when deciding whether to grant or withhold that consent.

The decision has significant implications for trustees, protectors, settlors and advisers alike, both when establishing trust structures and in their ongoing administration.

The debate: the narrower or wider role?

In many trust structures, particularly those involving professional offshore trustees, settlors appoint a protector to act as a watchdog. Often a trusted adviser, family friend or longstanding confidant, the protector may have a deeper understanding of the settlor’s intentions, family circumstances and wider objectives than the trustee. It is therefore common for trust instruments to require protector consent before trustees can exercise certain significant powers. 

The scope of the protector’s role in these circumstances has long been the subject of debate. When asked to consent to a trustee decision, is the protector merely reviewing whether the trustee has acted lawfully and rationally (the ‘Narrower Role’), or is the protector entitled to undertake their own assessment of the proposed decision and withhold consent even where the trustee's decision falls within the bounds of reasonable decision-making (the ‘Wider Role’)?

The Privy Council decision in X Trusts

The case concerned a series of discretionary trusts established for the benefit of two branches of the same family. The trustees proposed a substantial and unequal division of the trust assets between the two family branches, a decision which required the consent of the protectors under the terms of the trust instruments.

The protectors indicated that they were unlikely to approve the proposal. Importantly, their concerns did not stem from any suggestion that the trustees had acted irrationally or outside the scope of their powers. Rather, the protectors had reached a different conclusion based on their own assessment of what was appropriate in the circumstances.

Against that background, the matter ultimately came before the Privy Council to determine the proper scope of the protectors’ role when exercising their consent powers.

The Privy Council’s approach and conclusion

The Privy Council began by emphasising that the starting point is always the trust instrument itself. If the trust deed expressly limits the protector’s function, those restrictions will govern the scope of the role. However, where the instrument contains no such limitations, the protector will generally be regarded as having the wider role, entitling them to exercise independent fiduciary discretion when deciding whether to grant or withhold consent.

Applying that approach to the X Trusts, the Privy Council unanimously held that the trust instruments contained no express limitations on how the protectors were to exercise their consent function. The protectors were therefore entitled to exercise their own independent fiduciary discretion when considering the proposed exercise of power and could withhold consent even where the trustees’ decision was lawful and rational.

The Privy Council also recognised the commercial reality of modern trust structures. Protectors are not appointed simply to duplicate the legal and fiduciary analysis already undertaken by professional trustees. Rather, the office of protector is intended to provide an additional layer of oversight and judgement. As such, a protector’s consent power may carry genuine decision-making authority, rather than serving as a mere procedural safeguard.

Practical implications

Whether you are a settlor establishing a new trust, a trustee administering an existing structure or a protector exercising consent powers, the decision in X Trusts is a timely reminder to review how protector provisions operate in practice.

Revisiting existing trust instruments 

If a trust structure includes a protector, it is worth revisiting existing trust instruments to understand precisely how the protector consent powers are being framed. The Privy Council decision does not mean that every protector automatically has a wider role. However, where consent provisions are drafted in general terms and contain no express limitations, there is now a strong likelihood that a protector will be expected to exercise independent fiduciary discretion. 

Ensure drafting reflects your intentions

For those establishing new trusts or updating existing structures, clarity of drafting is more important than ever. Clear drafting can help avoid uncertainty, reduce the scope for disputes and ensure that all parties understand their respective responsibilities from the outset.

Involve protectors early in key decisions

The decision also highlights the importance of effective communication between trustees and protectors. Where a protector is expected to exercise independent judgement, involving them only at the final approval stage may create unnecessary delay or deadlock.

Early engagement allows trustees and protectors to discuss significant decisions as they develop, helping to identify concerns sooner and improving the prospects of reaching a well-considered outcome that serves the interests of the trust and its beneficiaries.

Understand whose interests are being protected

A key aspect of the judgment is the confirmation that protectors acting in a fiduciary capacity owe duties to the beneficiaries, not to the settlor personally. While a protector may have been chosen because of their knowledge of the settlor’s wishes and family circumstances, their role is not simply to carry out those wishes.

Trustees and protectors should therefore approach decision-making as a collaborative process focused on the interests of the beneficiaries, rather than an adversary representation of competing interests.

Review governance and risk protections

As protectors take on a more substantive role, their decisions may be subject to greater scrutiny and, in some cases, challenge. Trust instruments should therefore include appropriate indemnity and exoneration provisions, and protectors and trustees should consider whether additional protections, including insurance arrangements, are required.

Conclusion

So, are protectors watchdogs or decision-makers? After X Trusts, in the absence of clear drafting to the contrary, protectors who hold consent powers are likely to be regarded as exercising independent fiduciary discretion, rather than performing a narrower review function.

While the judgment brings welcome certainty, it also underscores the importance of thoughtful drafting, effective governance and constructive engagement between trustees and protectors. Those involved in the establishment and administration of trusts should take the opportunity to review existing arrangements and ensure that protector provisions accurately reflect the role intended.

Sinclair Gibson regularly advises trustees, protectors and settlors on the drafting, interpretation and restructuring of trust instruments containing protector provisions. We also assist clients in reviewing existing trust structures in light of X Trusts and in managing governance, risk and dispute-related issues arising from protector decision-making.