HARNEYS SETTLOR RESERVED POWERS TO RESERVE OR NOT TO RESERVE ? Emily Yiolitis Partner Harneys ALY LLC

Settlor Reserved Powers To Reserve or Not to Reserve? No Client wants a Trust

Settlor Reserved Powers To Reserve or Not to Reserve? Why Set up a Trust? Asset Protection; Tax Deferral or Optimization; Succession Planning; Circumvention of Forced Heirship Rules; Bypassing Probate; Confidentiality; Flexibility.

Settlor Reserved Powers To Reserve or Not to Reserve? What are Settlor Reserved Powers? Settlor Reserved Powers are those powers specifically drafted into a trust deed which a Settlor retains to him or herself when relinquishing control to the trustees while setting up a trust.

Settlor Reserved Powers To Reserve or Not to Reserve? Typical Reserved Powers To Remove Trustees; To Appoint New Trustees; To Add or Remove Beneficiaries; To Appoint or Remove a Director of an Underlying Company; To Revoke or Vary the Trust; To Change the Proper Law of the Trust; To Appoint Income and/or Capital; To Restrict the Exercise or Direct the Exercise of the Trustees’ Discretion.

Settlor Reserved Powers To Reserve or Not to Reserve? New Section 4A of the Cyprus International Trust Law permits a Settlor to reserve powers: to revoke, vary or amend the terms of a trust or any trusts or powers arising wholly or partly under it; to advance, appoint, pay or otherwise apply income or capital of the trust property or to give directions for the making of such advancement, appointment, payment or application; to act as, or give binding directions as to the appointment or removal of, a director or officer of any company wholly or partly owned by the trust; to give binding directions to the trustee in connection with the purchase, retention, sale, management, lending, pledging or charging of the trust property or the exercise of any powers or rights arising from such property; to appoint or remove any trustee, enforcer, protector or beneficiary; to appoint or remove an investment manager or investment adviser; to change the proper law of the trust or the forum of administration of the trust; and to restrict the exercise of any powers or discretions of a trustee by requiring that they shall only be exercisable with the consent of the settlor or any other person specified in the terms of the trust.

Similar Provisions Globally Section 86 of the British Virgin Islands trustee Act; Section 15 of the Trusts Guernsey Law 2007; Section 47 of the Nevis International Exempt Trust Ordinance; Section 9A of the Trust (Jersey) Law of 1984 as amended in 2006; Part III of the Cayman Trusts Law (2001 Revision) to the Trusts (Amendment) (Immediate Effect and Reserved Powers) Law 1998; Sections 3 and 81 (2) of the Bahamas Trustee Act 1998.

Hague Convention on Trusts Article 2 of the Hague Trusts Convention which provides that “the reservation by the settlor of certain rights and powers is not necessarily inconsistent with the existence of a trust”

Settlor Reserved Powers Risks and Pitfalls An attempt to attack the trust structure could come from a whole array of litigants such as: A disgruntled beneficiary; A tax authority; A divorcing spouse; A creditor; all of whom would come to the court in the hope of setting the trust aside in order to access the trust fund.

Settlor Reserved Powers Risks and Pitfalls Dangers include: Trust may be declared a Sham and set aside; Tax Migration; The Court may Compel Actions of Power Enabled Settlor.

Settlor Reserved Powers Risks and Pitfalls In Re Stephen J. Lawrence 279 F.3d 1294 (11th Cir. 2002), the Judge ruled that the settlor retained de facto control over the offshore trust through his power to appoint trustees and ordered him to pay over $7 million from the trust to a creditor; In the Marriage of Ashton (1986) 11 FamLR 457, 461, the husband, who had been a trustee of the trust and retained power to appoint and remove trustees was ordered to pay a lump sum payment to his divorcing wife; In the marriage of Goodwin Appeal No 172 of 1989, the Court recognised the reality of control by husband since ‘the husband had the sole power of appointment of the trustee, which was a creature under his control, and he was a beneficiary to whom the trustee could make payment exclusively of other beneficiaries as the husband saw fit.’ Order in favour of the wife; In Browne v Browne [1989] 1 FLR 291, the Court treated the trust in which the wife settlor had retained significant powers as though the trust assets were in reality owned by the wife. The order for made for payment of the husband.

Cyprus International Trust Law 1992 as amended in 2012: Conclusions Cyprus has a modernized, flexible and tax efficient trust regime. Recommendations: Obtain expert tax advice if you plan to move to Cyprus as a beneficiary of a CIT; Obtain expert legal advice on which powers you can reserve without endangering the very reasons you set up a trust; Use Negative rather than Positive powers wherever possible; Appoint a Protector; Consider set up of a Private Trust Company; Do not reserve the power to appoint or remove Trustees; Meet and choose Trustees carefully.

THANK YOU To Reserve or Not to Reserve? RESERVE CONSERVATIVELY THANK YOU