First Use. Trust protectors (referred to as a “Protectors” in this outline) were first used in connection with offshore asset protection trusts. U.S. persons who established such trusts were not willing to permit an offshore bank (as trustee of the offshore asset protection trust) to control a significant portion of such person’s assets without some sort of ability to impact that control.
Reason for Protector in Offshore Asset Protection Trust Context. Because the trust was intended to protect the settlor’s assets, the settlor couldn’t keep any control. Adding a U.S. person as another trustee might give U.S. creditors access to the trust funds through the U.S. court system. The solution was to create the role of Protector; not quite the same as a trustee (limiting, it was hoped, the ability of U.S. courts to gain jurisdiction over trust assets) but still someone with the power to exercise control (on behalf of the settlor – because the settlor couldn’t him or herself exercise control) over the trust.
New Uses. As trust practitioners became more familiar with the idea of a Protector, an additional purpose for such became apparent. As trust terms became longer and longer (because practitioners recognized the advantages not only of creditor protection but also avoidance of transfer taxes using generation-skipping tax exemptions for assets retained in trust for many generations), practitioners recognized that it would be impossible to predict what might happen during the trust’s long-term future. For example, there might be (a) changes to the law (including tax law), (b) changes to the family situation, (c) changes in the viability and efficacy of investments, (d) changes in the ability of persons chosen to act as trustee and (e) changes to how society views as best the way to provide for beneficiaries. Since the scope and direction of such changes could not be anticipated, adding a Protector with the power to modify the trust seemed a logical approach towards providing the flexibility to make such changes when they were appropriate.
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