Beyond protectors

  • Author : Barbara Hauser
  • Date : January 2009
ABOUT THE AUTHORBarbara R Hauser TEP is Director of the Private Wealth Advisory Group Stanford Group (Suisse) at AG

C lients use trusts for protection: protection of their wealth and protection of their family. Traditionally clients relied on the wisdom and integrity of the trustee, someone they knew and trusted. Later, with the spread of foreign trusts, which needed a trustee in a jurisdiction far from the client’s home, clients felt more reassured if they could also appoint someone they knew and trusted to be a ‘protector’ for them and their family. The protector would watch over the unfamiliar trustee, and could usually remove them. Over the years, numerous creative powers have been drafted into trust deeds allowing protectors to make, or veto, any number of decisions, resulting in academic debates over the legal nature and fiduciary liability of the protector – is the protector simply a traditional trustee with a new name?

My proposal is that we move beyond the protector debate and focus instead on the particular family, their assets, their concerns and their long-term goals. If we ask the client how they would like a trust to work, and who they would like to make which decisions – while keeping an open mind as to a way to fit those preferences into a trust deed – we might be adding people with roles that are tailored to provide just the functions that the client most wants. This approach can provide welcome assurances to those clients who have no experience with trusts (whether because they are in a civil law jurisdiction or follow Shari’a law), as well as to clients who have trusts but who assumed that their choices were limited to a trustee and, in the current vogue, a protector. The three other categories to consider adding, addressed below, are: advisors, committees and constitutions.

My proposal is that we move beyond the protector debate and focus instead on the particular family, their assets, their concerns and their long-term goals
Advisors

We all hear today about ‘the trusted advisor’ – but often a client has more than one advisor who is trusted. Often there are, in fact, numerous specialised trusted advisors: the more numerous they are the more likely it is that the client with have one ‘super trusted’ advisor, to monitor all of the other trusted advisors. This is often the primary role of a family office.

At the beginning end of the spectrum, let us assume there is one trusted family counsellor: the traditional family lawyer, solicitor or notaire. This person is someone who can be trusted to protect the wealth and protect the family. This advisor has a long-term role with the patriarch/matriarch and the children, enabling this advisor to monitor and guide the generational transfer of the wealth. In fact, this person is often the one who is chosen to act as the trustee. But what if the trustee must be someone in a different jurisdiction? Why not appoint this person as a ‘trust advisor’ in a generic sense? The trustee could be requested or required to consult with the trust advisor on all issues or on specific issues.

The next advisor a client is likely to add is an investment advisor. Again, why not name that person in the trust deed as the ‘investment advisor’? Next might be the tax advisor. Specific assets might involve an art curator, a yacht broker, an aircraft flight crew, an agricultural or oil advisor, leading up to the role of a single family office head executive. The point is to recreate as closely as possible the roles and advisors with whom the client has been working. They can all be assigned parallel roles in the ongoing operation of the trust. The trustee may well be relieved to share the responsibility with advisors whom the client trusted. The client would be relieved to know that his approach would be continued and that the wealth and family would be protected, by advisors he trusted. The role of the advisor would be clearly as an advisor only.

Committees

Certain roles seem to fit committees well. On their own initiative a number of wealthy families have created their own internal distribution committees. The group of potential beneficiaries will present their projected cash needs (and purposes) to a committee that includes senior family members. That committee will sort out the requests and prepare a recommendation to the trustee.Other families have created a role for their involvement in the investment strategies. An internally-selected group of interested family members will act as investment decision-makers together with the trustee (or the investment advisor). In addition to the value of participating in decisions that affect their portfolios, this level of family involvement is likely to limit the number of legal claims against a trustee when the investments do not perform well.

If the trust permits discretionary distributions for charities, a family philanthropic committee could be involved. The family may have its own charitable structures and endowments. By including a family philanthropic committee to advise the trustee, the family’s overall programme can be better coordinated.

A recent phenomenon is the creation of an educational committee. Families with generational wealth are putting together internal educational programmes, to ensure that each family member will be a confident manager of their private wealth, including their trust distributions. One of the key areas of education is often to understand the family trusts. If there is an educational committee the trustee could be requested or directed to engage in regular meetings to explain the nature of various trust decisions. One seasoned trustee in England has said that this one process is probably more valuable to the family than any of his other services.

Constitutions

The single most critical key to generational success, in my opinion, is the establishment of sound family ‘governance’ principles. When a family has learned how to make respectful, efficient decisions as a group for the matters that will affect them, they then have the reliance and mutual trust to weather any hard times. Their wealth will be protected; their family will be protected.

The process of establishing sound family governance involves developing a protocol for family meetings: who will attend, what will be addressed, and how will decisions be made. As part of that process many families work together to create their own ‘constitution’ – just as a country would be governed by a constitution. Done right, it is usually a lengthy process, often taking two or three years. The purpose is to concentrate on issues such as what is the history of their family, what is special about being a member of their family, what would they like their children to value, what needs will the children themselves express, how will they make decisions, etc. In a true constitutional sense, they can also follow the two meanings suggested by Professor Casper (Stanford University): ‘used descriptively, it refers chiefly to the historical struggle for constitutional recognition of the people’s right to ‘consent’ and certain other rights, freedoms, and privileges… Used prescriptively… its meaning incorporates those features of government seen as the essential elements of the… Constitution.’

One could argue that a family is itself a nation ‘writ small’ and that universal principles of justice should apply, including the ‘rule of law’ that seems essential to the creation and maintenance of a free society

To close this section on a global level, one could argue that a family is itself a nation ‘writ small’ and that universal principles of justice should apply, including the ‘rule of law’ that seems essential to the creation and maintenance of a free society. Family members who have truly participated in formulating their governance system are far less likely to bring negative challenges to disrupt the family. Part of any lasting constitution is to build in flexibility and methods in which it can be amended as needed. The object of any ‘good government’, according to Thomas Jefferson is ‘the care of human life and happiness, and not their destruction’.

In any event, when a family has invested in creating its own constitution, why not include that as part of the trust deed? The wealth should be administered for the family in accordance with the stated values of the family.


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