Balancing control and trust in reserved powers of investment

In the realm of trust management, the concept of reserved powers has emerged as a significant development, offering settlors a way to retain certain controls over their trust assets. This approach addresses the common concerns of relinquishing full ownership and management to trustees, especially when dealing with complex assets that require specialised knowledge. In this article, Andrew Hudson, Client Director – Private Wealth & Family Office Services at Equiom Jersey, delves into the intricacies of reserved powers trusts and their implications for settlors and trustees alike.  

Settlor control through reserved powers trusts 

Once a trust is established, a settlor transfers control of the assets settled on trust to the trustee, who manages those assets for the benefit of the beneficiaries. Historically, the settlor would provide guidance on how the trustee should manage the assets and who should benefit through a letter of wishes, a non-binding confidential document provided to the trustee for guidance, or through more formal methods such as prescriptive clauses under the trust deed.  

More recently, there has been a move towards reserved powers trusts (settlor directed), where the settlor reserves certain powers to themselves or a nominated person. Often, these powers relate to the power to appointing (and removing) trustees, managing investments, changing beneficiaries and modifying the trust law. It is important to note that not all of these powers should be reserved in every situation, and each case should be considered carefully to ensure that all the implications of reserving certain powers are fully understood.  

Concerns about trustee management 

Establishing a trust can be seen as a leap of faith for the settlor, effectively giving up ownership of their assets to a third party. There is an understandable desire to retain some control over these assets, their use and who can benefit, especially when the assets in question are more complex than a standard investment portfolio. Often, the concern is that a professional trustee will not have the knowledge, time, or experience to manage the investments, or even if they can, it will be exorbitantly expensive.  

Perhaps the assets consist of a private family trading company, where the entrepreneurial abilities of the family are the inherent value, which may be lost if the trustee seeks to take direct management of those assets. The trustee taking hands on control may also potentially limit the ability for succession planning, for example, bringing on board the younger generation to learn the family business.  

Risk and obligations of reserved powers  

Due care needs to be exercised, as there are potential pitfalls in reserving powers, such as tax implications and whether the reservation of extensive powers impacts the benefits of the trust for wealth preservation and protection for future generations. The settlor should also be made aware that such powers should only be exercised for the benefit of the beneficiaries. Additionally, the trustee retains an overriding obligation to ensure, as far as possible, that the powers are exercised in such a manner. In some circumstances, consideration should be given as to whether a power to veto is preferable to a power of reservation.  

Importance of jurisdiction and planning  

While the evolution of reserved powers for discretionary trusts has made them more palatable for settlors, especially those from regions where the trust concept is perhaps not so well established, their use in not without potential downsides. The trustee should take care to ensure that the terms of the trust, the reserved powers, and possible implications of the reservation of such powers, are fully understood by all concerned. One of the first questions may be, ‘where are the trust assets located?’ If they are located in a jurisdiction that looks unfavourably on reserved powers trusts, this may defeat the objects of establishing the trust.  

By working with the settlor’s professional advisors at an early stage in the planning process, the trustee should be able to mitigate risks and, as far as possible,  ensure that the validity of the trust is not called into question and that the settlor does not fall foul of adverse tax implications by retaining this level of control, while giving the settlor the flexibility over  investment management.  

Managing reserved powers trusts necessitates a delicate balance of control and trust. If you are looking to retain influence over your assets while ensuring their protection and growth, our team of experienced professionals is here to guide you.  

Speak with Andrew Hudson to discover how we can help you achieve peace of mind and secure your legacy for future generations.  

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations, and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.