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Trust Protector Role in Hong Kong: Powers, Limits, and Removal

What a protector is

A protector of a trust is an individual appointed under a trust deed to exercise certain powers in relation to the trust. Unlike the term "trustee", the term "protector" is not a term of art: the law does not recognise particular duties and powers implicit in the role of a protector as it does in the case of a trustee. It is up to the trust deed to define the duties and powers of a protector. That single proposition carries most of the practical consequences discussed below.

The role exists because of how discretionary trusts work. Discretionary trusts are commonly used in private wealth management because of their versatility in application — they can, among other things, help settlors and their intended beneficiaries reap tax benefits and protect assets from being claimed in legal proceedings. But for a discretionary trust to perform its intended function effectively, settlors must sufficiently divest themselves from trust assets. Trustees of such trusts are often given wide powers, including but not limited to the appointment and removal of beneficiaries and complete discretion over the distribution of trust assets. Settlors must therefore be extremely selective when choosing discretionary trustees, as any negligence or misconduct on their part can be highly detrimental to intended beneficiaries and require arduous litigious efforts to resolve.

In a discretionary trust, it is common to appoint a protector to provide the settlor with greater assurance that the trustee will conduct itself in a manner consistent with the settlor's wishes.

How a protector is appointed

A protector is appointed under the trust deed. There is no other route: the office, its holder and its powers are creatures of the instrument. In practice, protectors go by many different titles — appointors, guardians, nominators or otherwise — but what they are called is inconsequential. It is the powers conferred upon them in the trust deed which define a protector.

Powers commonly conferred

Trust deeds which include a protector often empower the protector to remove and appoint trustees and to veto the exercise by the trustee of certain powers, meaning that certain powers of the trustees are only exercisable with the protector's consent. Other common powers given to a protector include the power to add or remove a discretionary object and the power to revoke, alter or add to any provisions of the trust deed.

A non-exhaustive list of common powers includes the power to appoint and remove trustees; the power to appoint new or name successor protectors; and the power to require notice from trustees before they exercise certain powers. Typical powers also include requiring consent for distributions, investments, changes of trustees, adding or excluding beneficiaries, varying administrative provisions, or changing governing law. While the powers of a protector vary from trust to trust, the commonality between all protectors is that the powers they hold allow them to serve as a safeguard against any potential wrongdoing by a trustee.

Why the protector is not a trustee, and where the limits fall

A protector is not automatically a fiduciary in the way a trustee is. Given the absence of implied obligations for a protector, Hong Kong courts look to the trust deed itself to determine whether a protector owes fiduciary or fiduciary-like duties. In construing the deed, the courts ask for whose benefit the powers of the protector have been given. Relevant considerations include whether the protector has other roles such as trustee, discretionary beneficiary or settlor, what powers are conferred, and the overall effect of those powers individually and together. Where the purpose and intention of the settlor was that the protector would be able to benefit under the trusts, the courts will hold that the protector owes no fiduciary obligations which would disable the protector from acting in his own interest.

The corollary is that the drafting, not the label, decides how much room a protector has. A protector whose powers are supervisory stays outside the trustee's office; a protector whose powers go further may not.

Two ways the role goes wrong

The first is over-reach. Where a protector takes on more than a merely supervisory role in the exercise of powers, it is even possible that they will be viewed as a de facto trustee.

The second is more damaging, because it strikes at the reason the trust was settled. It is possible for a settlor to appoint themselves as protector, and a settlor who does so can retain significantly more control over trust assets than would otherwise be possible. But settlors should be minded not to confer too much power on themselves. Should contentious issues arise, courts may come to the view that the settlor has not sufficiently divested themselves from the trust assets, thus frustrating the asset-protection aspect of trusts. In Kan Lai Kwan v Poon To Otto & Another (2014) 17 HKCFAR 414, it was held that trust assets formed part of the settlor's financial resources available to the matrimonial pot. This was because, among other things, the settlor was also the protector and reserved to himself important powers, such that it was obvious that he intended for his views in relation to the administration of the trust to be given great weight.

The same risk is expressed another way: if a person who settles a discretionary family trust appoints himself as protector and is, in effect, able to prevent the trustees from distributing trust assets to anyone but himself, a court may find that the discretionary trust is not in fact a discretionary trust at all.

A separate risk attaches to whoever holds the office. Even where a protector has good intentions and maintains integrity throughout the duration of the trust, there is a risk — especially where the protector is a layman or is unfamiliar with trust law — that they may unintentionally attract liability onto the trust, onto themselves, or both. And because the office is defined by the instrument, acts outside the powers given are invalid.

Resignation, succession and a vacant office

The term "protector" is not generally defined by statute or settled case law; it is a descriptive label whose scope depends on the trust instrument. There is accordingly no standard statutory or case-law mechanism for removing a protector to describe. Removal is a recognised practical and drafting issue, and the answer to it sits in the trust deed.

In practice, deeds deal with this by conferring the power themselves: a common power is the power to appoint new or name successor protectors, so that succession is arranged by the mechanism the settlor chose rather than by any external procedure. A deed that creates the office should therefore state who may bring the office to an end, who names the successor, and how a successor is identified and takes office.

The harder question is what happens when nobody holds the office. Because certain trustee powers are exercisable only with the protector's consent, the deed needs to address what occurs during a vacancy — whether the consent requirement is simply unmet until a successor is in place, or whether the restriction falls away. That is a drafting choice, not something supplied by the general law. A related consequence follows from the same principle: a protector who purports to act beyond the powers conferred is acting outside the office, and the act is invalid.

What service providers must do

Hong Kong's Guidance for a Risk-Based Approach for Trust and Company Service Providers (TCSPs) imposes identification duties on the regulated service provider, not on the protector. Where a TCSP is not itself acting as a protector and a protector has been appointed, it is necessary for the TCSP to obtain information to enable it to identify and verify the identity of the protector. Where the protector is a legal entity, the TCSP should obtain sufficient information that it can satisfy itself who is the controlling person and beneficial owner of the protector, and take reasonable measures to verify their identity. Where the protector is a listed entity, or an entity forming part of a listed group, or an entity established and regulated to carry on trust business in a jurisdiction identified by credible sources as having appropriate AML/CFT laws, regulations and other measures, the TCSP should obtain information to enable it to satisfy itself as to the identity of the directors or other controlling persons. A change of trustee or protector is among the changes a TCSP is expected to report to the regulator.

Key takeaways