23 April 2021
Trusts, as arrangements to hold assets, are a long established as a means for high net worth individuals to manage their affairs and plan for their family’s future prosperity. Professional advisers will often advocate trusts for a number of reasons, ranging from tax planning to asset protection, and highlight the fundamental and wide-ranging duties of a Trustee which cannot be avoided by contract. However, for such individuals to part with their hard-earned wealth (often a substantial portion thereof), can be something of a wrench – typically, establishing a trust means giving over full control over assets which many HNWIs are, understandably, loathed to do. This, therefore, creates a conundrum regarding how to achieve the benefits afforded by the settlement of a trust but at the same time be confident that the assets going into that trust are safe and can be applied in accordance with the HWNI’s wishes.
One possible solution is to settle a trust but to reserve certain powers for the HWNI who can, therefore, maintain certain controls over the assets without compromising the existence or validity of the trust – this type of trust has come to be called a Reserved Powers Trust – an “RPT”.
An RPT in Guernsey
The enforceability and treatment of an RPT is not always clear in certain jurisdictions. However, The Trusts (Guernsey) Law 2007 at Section 15 specifically provides that the reservation of certain powers by a settlor in a trust deed will not compromise the validity of the relevant trust. The powers listed in Section 15, in practice, allow for the settlor to retain the ability to compel the payment of benefits, control the investment of the assets and change the trustee of the trust thereby allowing the settlor to have substantial influence and control over the trust (without compromising its integrity). By enshrining the potential for reservation of powers in law, the Guernsey regime has given substantial comfort to those HWNIs who wish to benefit from a well-regulated jurisdiction with a strong, secure legal framework but don’t wish to relinquish full control of their wealth and how it is spent.
Consequences of an RPT for the HWNI – the challenges of control
The impact of reserving powers on the personal circumstances of the HWNI must always be carefully considered. Where there is a connection (especially by way of residence) to a jurisdiction with a sophisticated taxation regime, particularly with anti-avoidance measures relating to trusts, extreme caution should be applied and professional tax advice should be obtained – in such circumstances, it is clearly very undesirable that the trust becomes ‘transparent’ and the HWNI is treated as the owner of the trust assets
However, where it is determined that there is no adverse impact, the RPT becomes ideal for HWNIs to manage their assets, for example where they wish to preserve the assets in a safer jurisdiction than that in which they are resident or where they wish to plan and carefully provide for their family’s future in a professional environment.
RPTs and Professional Trustees
For a professional trustee, regulated in Guernsey, there is no issue, from a fiduciary perspective, to acting as a trustee of an RPT – the professional trustee will liaise with the settlor/HNWI as required under the trust deed and administer the trust accordingly. However, any HNWI looking to establish an RPT (or adviser considering one that individual’s behalf) needs to be aware that the professional trustee will still be obliged to assess any action it takes on the basis of Guernsey’s AML/CFT regime - even though the RPT may purport to compel the professional trustee to act on an ‘execution only’ basis, it will still be required apply relevant due diligence methods. Therefore, it is important that all parties are aware of this limitation in order to ensure that the person with ‘the powers’ does not become frustrated.
Invicta and Reserved Powers Trusts
Invicta has established RPTs for clients with some success. A particular benefit has been that the creation of a trust as an RPT has allowed the trustee to effectively delegate to the individual, possessing the relevant powers, the power to invest the trust assets at will and without trustee consultation (as long as he/she remains within certain parameters agreed with the trustee in advance). Invicta has also found that, with careful thought and planning, the use of an RPT can help to reduce the overall cost of a structure due to the inherent reduction in fiduciary oversight that is required (and therefore a reduction in time-spent by Invicta).
An RPT therefore represents an effective solution for HWNIs who want to maintain some control over their assets and who is to benefit from them whilst settling them into a Guernsey trust..
Please note that this article is intended to provide a very general overview of RPTs. It is not intended as legal or tax advice and should not be relied on as such.