Fact Sheet Settlor Reserved Powers
Fact Sheet
Settlor Reserved Powers
In a Reserved Power Trust certain powers are reserved by the
settlor, or given to a third party, on the creation of the trust. It
will come as no surprise that the most popular power the
settlor usually wishes to retain is the right to direct the
investment of the trust fund. In these cases, the trustees, on
acceptance of the trust fund, have a duty to manage the
assets until a prescribed direction is invoked by the settlor,
usually by way of a written instruction.
Once the settlor has exercised the reserved power, the trustee must act in accordance
with his direction. In the absence of a prescribed direction from the settlor it is the
trustee’s responsibility to manage the investment of the trust fund with all that this entails
for the professional trustee. The trustee will continue to act in this way until the settlor
envokes the powers he has reserved. When he does so the trustees must follow the
settlor’s instructions and trade on the investments as directed.
There are minor variances between different jurisdictions for settlor reserved power
legislation, but the main thrust is that reservation of any of the powers expressed shall not
affect the validity of the trust. In addition, a trustee who acts in accordance with the
exercise by the settlor of his reserved powers is not acting in breach of trust.
Background to Settlor Reserved Powers
Settlor Reserved Power Trusts have grown in popularity since 1998, the year in which the
Cayman Islands first introduced legislation on this concept, with other jurisdictions
following suit including the Bahamas and Jersey.
In a fully Discretionary Trust the settlor passes legal ownership, control and management
of the assets added to the trust to the trustees to manage these on behalf of the
beneficiaries.
Although common law sheds doubt on the legality of a trust where the settlor has
reserved extensive powers, there appears to be no such problem when a few specific
powers are retained, either by the settlor or a nominated third party.
What Powers May Usually be Reserved?
EFG Wealth
Solutions (Jersey)
Limited
PO Box 641
No 1 Seaton Place
St Helier
Jersey JE4 8YJ
Channel Islands
Tel: + 44 1534 605 600
Fax: + 44 1534 605 605
www.efginternational.com
07/10
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To retain a beneficial interest in the trust property;
To revoke or vary the terms of the trust;
To direct on the advancement of income or capital;
To appoint directors of an underlying company or arrange their removal;
Power over investment of the trust fund, including the right to give binding
directions to the trustees with regard to the purchase, retention, sale,
management, lending, pledging or charging of the trust property;
Appointment and removal of trustees;
Appointment and removal of an investment manager or advisor.
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As you can see this is quite an extensive list and reservation of all, or the majority of
these powers, may cast doubt on the validity of the trust. It is important to determine the
settlor’s wishes at the outset to ensure the minimum number of powers are reserved to
give the maximum possible benefit.
Fact Sheet Settlor Reserved Powers
Why use Reserved Powers?
You can see the benefit to the settlor in creating a reserved powers trust, but why would
the trustee be happy to accept a limitation of their own general powers? To understand
this we need to consider what conflicts could arise where you have a fully discretionary
trust or powers are vested in the trustees but the settlor himself is minded to suggest or
recommend individual investment transactions to the trustees. This can be fraught with
difficulty and potentially damage the settlor/trustee relationship if there are opposing
opinions as to whether any particular transaction is worth pursuing.
Reserved powers are a way of allowing the settlor to retain control over certain areas of
the trust fund and are particularly appropriate where the settlor would wish the trustees to
invest as follows:
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In non-professionally managed assets, such as execution only trades;
In non-diversified assets, such as single lines of stock.
Settlor
Trustees
Trust Fund
Managed
Portfolios
Shares in
Private Company
Settlor has given a
prescribed direction to
purchase shares in a
private company and
a large, single line of a
quoted investment
stock
Single Line
Of Stock
In this example the trustees have discretion over, and ultimate responsibility for the
assets they have placed with the professional investment manager. The assets which
they have been instructed to purchase by the settlor are no longer the day to day
responsibility of the trustee, who is under no obligation to monitor the on-going
performance.
It is important to note that although these powers are commonly reserved to the settlor, it
would also be acceptable to nominate a third party as the power holder.
Part of EFG International, EFG Wealth Solutions (Jersey)
Limited provides fiduciary, corporate, fund administration and
securities services to high net worth individuals, corporate
and institutional clients.
For further information on this or any other services please do not hesitate to
discuss with your usual EFG Wealth Solutions contact or with:
Julie Collins
Head of Business Development
Tel: + 44 1534 605 690
Email: julie.collins@efgwealthsolutions.com
EFG Wealth
Solutions (Jersey)
Limited
PO Box 641
No 1 Seaton Place
St Helier
Jersey JE4 8YJ
Channel Islands
Tel: + 44 1534 605 600
Fax: + 44 1534 605 605
www.efginternational.com
07/10
Important Information
We believe that the information in this fact sheet is accurate. However, it is unavoidably general in content and
should not be relied upon in making a specific decision. EFG Wealth Solutions (Jersey) Limited strongly
recommend that before making a decision to create an offshore structure, clients should take professional legal
and tax advice in their country of residence. EFG Wealth Solutions (Jersey) Limited is regulated by the Jersey
Financial Services Commission.
Publication date: November 2013
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