In conventional trusts, the trustee generally have a high level of control over the trust asset and the settlor has no rights left in respect of the trust asset. However, many settlors are not comfortable with the idea of handing over complete or exclusive control over their asset to another party. Arising from this, a number of jurisdictions have formalised what are often referred to as reserved powers trust. Specific legislations had been enacted to ensure that settlor’s reserved powers arrangements can be put in place without prejudicing the validity of the trusts themselves.
When a settlor creates a Reserved Powers Trust, he can reserve to himself, or grant to a third party (eg. a protector), certain rights and powers. Most commonly, settlors will wish to reserve:
- powers to appoint / remove investment managers, brokers
- powers of investment
Amongst jurisdictions which allow exercise of reserved powers without invalidating a trust are Jersey, Guernsey, Singapore, Labuan and Cayman Islands.
Example 1: Power to give investment directions
Example 2: Power to effect investments
There are good reasons why settlors who are more knowledgeable and sophisticated, and demand a more active involvement in investment decisions would want to reserve powers over the trust. Trustees are increasingly recognising the potential advantages of structuring trusts as reserved power trusts rather than as fully discretionary trusts, in appropriate cases.
However, the degree of settlor’s control has to be balanced against the fundamental concept of trust.