For many settlors the benefits a trust can provide are
attractive. However, giving up control of significant assets to
trustees (albeit trustees the settlor has selected) may be a
concern. Significant time and expertise is often devoted to
selecting a jurisdiction in which the settlor may retain maximum
control over settled assets without invalidating the trust.
Conscious of this issue, and its importance in attracting
international trust business, Bermuda has moved to more clearly
define its position on settlor reserved powers with the
introduction of the Trusts (Special Provisions) Amendment Act
2014.
Until last year, the Bermuda law on reserved powers was set out in
section 2(3) of the Trusts (Special Provisions) Act 1989, which
stated 'The reservation by the settlor of certain rights
and powers, and the fact that the trustee may himself have rights
as a beneficiary, are not necessarily inconsistent with the
existence of a trust.'
The Act extends the wording of section 2(3) to also cover powers
granted by the settlor and (without prejudice to the generality of
section 2(3)) expressly sets out a wide range of powers which a
settlor can reserve or grant without invalidating the trust,
including:
- (in the case of a reservation to the settlor or other donor of trust property) a power to revoke the trust in whole or in part;
- a power to vary or amend the terms of a trust instrument or any of the trusts, purposes or powers arising thereunder in whole or in part;
- a power to decide on or give directions to advance, appoint, pay, apply distribute or transfer the trust property;
- a power to act as, or give directions as to the appointment or removal of directors or officers of companies owned by the trust, or to direct the trustees how to exercise voting rights with respect to the shares of such companies;
- a power to give directions in connection with investments or the exercise of any powers or rights arising from such trust property;
- a power to appoint, add, remove or replace any trustee, protector, enforcer or other office holder or advisor;
- a power to add, remove or exclude an beneficiary, class of beneficiaries or purpose;
- a power to change the governing law and the forum for administration of the trust; and
- a power to restrict the exercise of any powers, discretions or functions of a trustee by requiring that they shall only be exercisable with the consent, or at the direction, of a person or the persons specified in the trust instrument.
The very wide powers expressly sanctioned by the Bermuda
legislation provides scope for a settlor to exert (whether
personally or through a trusted appointee) a degree of control
which may in other jurisdictions lead to allegations of sham or
invalidity.
In passing this legislation, Bermuda is making a clear play for
business from the international settlor. However, when deciding on
any jurisdiction, and the extent to which powers should be reserved
to a settlor, it is necessary to consider the aims of the trust. If
asset protection is one aspect, and particularly asset protection
on divorce, settlors should be reminded of the powers of the
English Court to vary nuptial settlements or to treat trust assets
as a resource of the parties, and the fact that settlors have such
powers could be relevant in the determination of how a settlement
is treated on divorce.
In Charman v Charman [2007] EWCA Civ 503 the Court of
Appeal left open the question of the extent to which the fact that
Mr Charman (who was the settlor of the trust) had power to change
the trustees, was relevant to the question of whether, and if so,
to what degree, the trust was a resource? In that case the wife
argued that as Mr Charman had reserved those powers to himself the
trust assets should be considered as his resource, essentially,
because he could exert control to enable implementation of a court
order to take place by selecting trustees who were willing to
comply with the Court Order in the event that the current trustees
were not willing to do so.
As it happened the Court of Appeal found that it could establish
that the trust was a resource of the husband by relying on other
factors so this issue was not determined, but instead left to be
dealt with on another occasion. It does, however, illustrate the
potential dangers of settlor's reserved powers.
In Prest v Petrodel & Others [2013] SC34 is Supreme
Court authority that the question of control is relevant to
determining the resources of a party. Although the case did not
relate to trust assets, Lady Hale agreed with Lord Sumption [check
spelling] that control was not relevant to the question of
establishing whether a property adjustment order could be made
against an asset. However, she found that control was relevant to
the assessment of a party's resources under s25(2) of the
Matrimonial Causes Act 1973.
In terms of settlors' wishes and intentions, these can also
have an important impact upon the treatment of trust assets.
Although the recent decision of P v P [2015] EWCA 447 did not
involve a Court assessing the settlor's reserved powers, when
it came to determining whether the trust was a nuptial settlement
and, if so, what the nuptial element was, one of the settlors gave
evidence in the case setting out his intentions at the time the
trust was created. Mostyn J, who gave the first instance decision,
looked at the powers of the trust which enabled the trustees to
distribute the capital to the husband (the settlors' son). He
also took into account the settlors' intentions, which were to
enable the son to live in the property for the rest of his life,
but with power to distribute the capital to him, and held that the
entire trust was a nuptial settlement. In making the award,
however, in addition to a lump sum he awarded the wife a life
interest in a sum of money to enable her to acquire a property for
life. The decision was appealed by the trustees. Although the Court
of Appeal found that Mostyn J was correct to give 'heavy
weight' to the settlors' intentions at the time the trust
was created for assets to remain in the family, it also considered
that he had properly balanced those intentions as against the
Court's obligations to achieve fairness to the wife by making
the award to meet her housing needs.
These cases therefore illustrate that whilst settlors may have more
options available to them to retain certain levels of control, and
they may wish to set out their intentions upon the trust being
created, advice should be obtained on how such powers and
intentions may be treated in the context of a divorce of either the
settlor or other beneficiaries. As with many decisions when
settling assets on trust it is a balancing exercise that should be
carried out carefully and by reference to the specific facts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.