Case study: when a protector and trustee disagree over a distribution

A case study of a protector and trustee disagreement is most useful when it shows how the argument was resolved, not just that it happened. The story below is fictional and anonymous: it is an illustration built from situations that arise in practice, not a description of a real client, trustee or family. It follows one dispute from the first email to the settlement, and asks what it reveals about choosing, assessing or changing a trustee in Switzerland.

A fictional case, not a real client

Treat every detail here as invented. The people, the assets and the sequence of events were chosen to make the legal questions visible. Your own trust may be governed by a different law, drafted with different powers, and administered in a different way. The answer to "who prevails?" always comes from the document and the governing law, so it needs an individual analysis.

The family and the trust

Example: a family established in Lausanne set up a discretionary trust some years ago. The settlor, whom we will call the founder, transferred a portfolio of investments and shares in a family company to a corporate trustee in Geneva. The trust deed named the founder's two adult children and their descendants as discretionary beneficiaries, and appointed an old friend of the founder, a retired lawyer, as protector.

The deed gave the trustee wide discretion over distributions. It also gave the protector a power to consent to certain decisions, among them any distribution above a level the deed describes in general terms. The founder kept no other reserved power. If you are unsure what that means in practice, the guide on settlor reserved powers and the trustee explains the trade-off.

Because the trustee was authorised and supervised in Switzerland, the family had assumed that the structure was settled for good. Foreign trusts are recognised in Switzerland under the Hague Convention, in force for Switzerland since 1 July 2007. Recognition, however, says nothing about how a protector and a trustee share authority inside the deed.

The disagreement

The younger child asked the trustee for a substantial distribution to help buy a home. The trustee reviewed the request, looked at the family's circumstances and the trust's liquidity, and concluded that a distribution was reasonable. Because of its size, the deed required the protector's consent.

The protector refused. His reasons were partly principled and partly personal: he feared that the distribution would unbalance the two branches of the family, and he had never been consulted on the home purchase. The trustee replied that the request fell squarely within the purposes of the trust and that a refusal without clear reasons was not acceptable.

Within a few weeks the exchange had turned bitter. The elder child wrote to ask what the protector's veto actually covered. The founder, who no longer held any power over distributions, was asked by everyone to "just decide".

Who has the last word?

Nobody has the last word by default. The outcome turned on a sequence of questions, which the diagram below sets out.

In this case the answer to the first question was yes: the protector's consent was a real condition. The second answer was also yes, because the deed asked the protector to act in good faith. The dispute therefore came down to the third question: were the protector's reasons connected to the purposes of the trust?

How it was settled

The trustee did not override the protector, and it did not go straight to court. It took three practical steps, described here without time limits because the right pace depends on the deed.

Writing down the powers

The trustee asked its own counsel and the family's adviser to produce a short note of what the deed actually said about consent, reasons and removal. The note showed that the protector could be replaced, but only on a ground the deed listed, and that the founder had no power to remove him simply because the founder disagreed.

Separating the two concerns

The protector's real worry was fairness between the two branches. The trustee's concern was that the request was legitimate. By putting both concerns on paper, the parties saw that they were not in conflict. The trustee proposed a staged distribution, supported by a revised letter of wishes in which the founder explained his intentions on equal treatment. Our page on letters of wishes and your trustee shows how such a letter is used without binding the trustee.

A recorded decision

The protector gave his consent to the staged distribution. The trustee minuted its reasons, the protector's reasons, and the points on which they had differed. Both sides agreed to meet at set intervals so that a future disagreement would arrive earlier and with less heat. A court was never needed.

The questions the case examined

The limits of this case

A fictional case cannot settle your question. Several limits are worth stating plainly.

• The governing law matters. A deed governed by a foreign law may treat a protector's duties differently from a deed under another law. The Hague Convention recognises the trust, but it does not harmonise these rules.
• Mandatory local rules can apply. Article 15 of the Convention preserves mandatory rules of the forum on matters such as protection of minors and incapacitated persons, matrimonial effects, succession rights and the protection of creditors. A protector's veto does not displace them.
• Foreign judgments. Where a dispute reaches a court abroad, Article 149e of the Swiss private international law statute (LDIP) lists the circumstances in which a foreign decision on a trust is recognised in Switzerland, for instance when it comes from the court validly designated or from the state whose law governs the trust.
• Tax is a separate analysis. The distribution here had tax consequences for the beneficiary, and they depend on the type of trust and on where the beneficiary lives.

What to take from it when choosing or changing a trustee

The dispute was ordinary; the lesson is about preparation. Before you appoint or replace a trustee, ask how the trustee handles disagreement with a protector, and look for evidence in the way it records decisions. The guide on due diligence on your trustee lists what to ask, and the page on the trustee, protector and beneficiary triangle explains how the three roles are supposed to balance one another.

If a protector is part of your plan, compare the options in trustee with or without a protector and read about working with a protector. If a relationship has already broken down, switch trustee or stay and fix and a dispute between beneficiaries and the trustee cover the next steps. For wider context, see myths about protectors.