Settlor Reserved Powers

Introduction

It is inherent to the creation of a trust that ownership of assets passes from the existing owner (settlor) to the trustee. Historically transfer of ownership also meant more or less complete transfer of control of the trust assets to the trustee.

How to ensure proper management of trust assets no longer under their ownership or control was not an uncommon dilemma for individuals considering the establishment a trust structure to hold their wealth. Especially if the nature of the assets, for example a family business, meant that hands-on day-to-day asset administration would sit better with the existing management than with the trustees.

This can be particularly important for settlors who are successful entrepreneurs and/ or who wish to protect their "crown jewel" assets. Such individuals often realise that their vision of strategic business and wealth creation does not sit easily with trustees' wide discretionary powers who are bound by duties of prudence and conservative investment.

Also in some jurisdictions, such as the USA where such trusts are known as "grantor trusts", there might be tax advantages where the settlor can, for example, distribute income to beneficiaries without taxation consequences (it should be noted that we understand the US Government is looking at changing the tax rules relating to grantor trusts). However, tax advantages are by no means a primary reason for the use of reserved powers.

That duty of prudent investment and asset management imposed on trustees by law also meant that fiduciary businesses feared exposure to breach of trust claims if they assumed trusteeship of trust structures for which the settlor's expectation was no, or very limited, diversification of the trust assets. Cases such a Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 51, made it clear that trustees would not necessarily avoid such breach of trust claims simply by placing trust assets in an underlying corporate vehicle.

Implementation of reserved powers into law

A number of offshore finance jurisdictions therefore sought to address that conundrum by implementing legislation which accommodates an element of control over administration of trust assets being retained with the settlor (or granted to another), and which removes or limits the trustees' duty to interfere in the management of those assets (notably, the Star Trust in the Cayman Islands and the VISTA trust in the BVI).

Similarly, in 2006 the Trusts (Jersey) Law 1984 ("Law") was amended to introduce a statutory ability for a settlor to either reserve to himself or grant to another (such as a protector) certain powers, therefore allowing Jersey trusts to be as flexible as possible in an ever competitive market place.

In fact, so called "settlor reserved powers" had been drafted into Jersey trust instruments for many years before 2006. However, such powers had never been tested before the Jersey Courts. Consequently, lawyers had some reservations as to whether such powers would be upheld as valid before the Courts. To address this, Article 9A of the Law was introduced to confirm that a reservation or grant by a settlor of such powers as are specified in the Law shall not affect the validity of a Jersey trust nor delay it taking...