In this article I explain the basis of the role of a protector in a trust or foundation. I will explain what protectors are, what they do, and help you decide whether including one in your trust or foundation is a good idea.
What is a Protector?
A protector is also sometimes called a supervisor. As this second name suggests, a supervisor is a person who supervises your trustees as they administer your trust. Their role is to ensure that your trustees follow the rules you set when you created your trust.
Protectors typically have the power to:
- Monitor the actions of trustees
- Ensure trustees comply with your instructions
- Replace trustees if they fail in their duties
- Approve major decisions made by trustees
Although the Czech Civil Code does not explicitly outline the role of a protector in trusts, it also does not prevent them from being appointed. On the other hand, if you are using an international structure, protectors are a very common feature in most trusts and foundations. (In Czech Private Family Foundations, a protector is a legally required part of the structure).
You may see both terms—‘Supervisor’ and ‘Protector’—used interchangeably. Legally, they describe the same role. The choice of wording reflects the role’s intended function. But because the role is not legally defined in Czech, you can choose something else if you like in a Czech structure, for example ‘Lord of the Trust’ or ‘Head Honcho’!
Supervisors are especially useful in two key areas:
- Asset protection
- Multi-generational family succession planning
In this article, I will be focusing on this second use.
Much of my practice is focused on helping families design and implement their business and wealth succession plans.
Depending on how complicated your life is, your family succession plan can sometimes be quite straightforward, but in other cases, especially if you have a successful family business or a lot of accumulated wealth, it can be much more complicated. In these more complex cases your succession plan will often involve a range of legal structures such as holding companies, family councils, trusts and foundations. You will also typically write a number of important documents – including your family constitution and your letter of wishes. All these structures and documents are designed to help you give effect to your goals.
However, when you start peeling away the surface layers of this onion, you will find that what is underneath it all is really just a set of rules – because that’s what your succession plan really is; a set of rules, made by you, perhaps together with your family members, which creates a road-map for the future of your family’s wealth.
When you create rules, it’s a good idea to have someone to enforce those rules. It’s just like in the community in which we live. We have rules (laws) and most of the time, we can rely on people to follow those rules. So we don’t kill each other, we don’t steal things from each other, we don’t drive through town at 150 kph, and so on. But we also know that it can happen that sometimes there is a temptation for some people to break those rules. And that’s the reason why, in our society, we have police. It’s their job to make sure the rules are obeyed.
During your lifetime, you are the one who makes sure your rules are followed.
But what happens when you are gone? Who takes over as ‘policeman’ then?
One of the most common mistakes I see in succession planning is that people don’t have a policeman. Instead, they pass complete control to their children after they have gone. Of course, for some families, that’s fine.
But if that’s fine, then did you go to all the trouble of creating a multi-generational family dynasty structure in the first place? In most cases, you did it to protect your children from themselves, and to ensure the survival and success of your family enterprise. You did it because you wanted to benefit, but not harm your children, grandchildren, great-grandchildren, and future generations.
If you pass absolute control to your children (if there is no policeman), there will be a very strong temptation for them to destroy everything you have built and to just grab the money.
Trust protectors exist in these situations not just to monitor your trustees, but also to stop your children from doing that. A trust protector is a person (or sometimes a company) that acts as your ‘voice from beyond the grave’ enforcing not just your rules but sometimes also reminding others of your guiding ethical and moral principles.
How does it work in practice?
A protector is usually someone independent from outside the family. Quite often it is a professional trust adviser or trustee company. The protector may not have any power at all until the founder has died
After that, the protector holds the set of rules and guidelines that you, as the founder, created during your lifetime. These rules might say specific things like ‘don’t sell the business for at least 15 years’ or they might be more general ‘Give my children enough support to allow them to lead rich and fulfilling lives, but do not give them so much that it spoils them’
The protector then takes on quite a passive role. They are not proactive. They do not create recommendations. Like the police in our analogy, they don’t interfere, (and don’t need to interfere) unless something goes wrong.
Instead, they simply allow the family and the trustees to do whatever it is they want, and what they think is best within the confines of the rules. They watch and monitor and usually consult, but they do not need to interfere until the family or the trustees try to do something (for example sell the business or grab all the money) that conflicts with your rules. In that case, the protector has a ‘veto’ power, to help make sure that things stay on the right track.
Of course, in an extreme case, your protector also has the power to fire the trustees. But in real life, this power is almost never used, just in the same way that the police rarely need to arrest people. It is the rules and the system that prevent the bad things from happening – long before the protector’s powers ever need to be used.
In many cases, the protector also helps support and guide the family and the trustees in their discussions and decision-making. It is sometimes useful to have a wise, experienced and independent person to turn to for advice.
The role of protector is often formalized in the legal documents that create trusts and foundations, but I recommend giving the protector a wider role. This can be set out in your family constitution and means your protector can be active in overseeing the management of family companies or your family governance structures.
Do I need a protector in my family structure?
The answer is that it depends. Every family is different, and every family sets different rules for its own future. However, as you set your rules, beware of accidentally creating ‘democracies’. If you give future generations absolute power to do whatever they want, there is a risk (probably a pretty high risk) that they will do something different from what you would have wanted. If that concerns you, then incorporating a protector into your family structure may be a wise decision.
Any questions?
If you have any questions or would like to talk about building a protector into your family structure, please just let me know.
