AuthorTEY Tsun Hang BCL (Oxford), LLB (KCL), AKC; Barrister (Gray’s Inn), Advocate & Solicitor (Singapore), Advocate & Solicitor (Malaya); Associate Professor, Faculty of Law, National University of Singapore.
Citation(2009) 21 SAcLJ 517
Published date01 December 2009
Date01 December 2009

Modern attitudes to disposition of wealth and the changing nature of trust instruments have promoted the desire for more reserved powers for settlors in modern trusts. This article first discusses the various factors driving the demand for such reservations, and the benefits from such use, before considering the concerns over the extent of such reservations. With some jurisdictions looking set to amend their trust regimes to accommodate the demand of settlors and to liberalise the allowable degree of such reservations, this article articulates the proper parameters that should be set for such reservations, to ensure that the fundamental concept of trust — under which the trustee is held to strict fiduciary duties towards the beneficial owners — is not prejudiced by such a trend.

I. Different attitudes towards reserved powers

1 The conventional trust doctrine stipulates that once a settlor

transfers property to trustees, the settlor has no rights left in respect of the trust property.1 Unlike beneficiaries in whom are vested the equitable interests, the settlor does not have any proprietary rights to give him locus standi to sue for enforcement.2

2 However, attitudes to disposition of wealth, and the use of trusts, have been changing. For the dual reasons of tax and confidentiality, settlors would want to alienate ownership and control of their estates to ensure that they have no interest under the settlement. On the other hand, settlors are not comfortable with the idea of handing over complete or exclusive control to others. The reserved powers for settlors fill these needs.

3 Attitudes towards such reservations differ greatly between jurisdictions. Article 2 of the Hague Trusts Convention3 clarifies that “the reservation by the settlor of certain rights and powers … [is] not necessarily inconsistent with the existence of a trust”. In many onshore trust jurisdictions, there are adverse tax consequences where the settlor is held to have maintained some extent of beneficial interest in property notwithstanding the transfer of it to the trustee.4 A trust arrangement, in which the settlor retains excessive control over the trust functions, may be held to be a testamentary disposition — the “trust” does not take effect until the settlor dies.

4 The English Trustee Act 20005 is silent on the issue of settlor’s reserved powers. Although there remains uncertainty as to what is permitted, and what is not, with regard to settlor’s reserved powers,6 the ability of a settlor of an English trust to reserve extensive powers to himself under the terms of the trust is limited. This is due to the doctrine of bare trust. A settlor of a trust to which English law applies, who reserves such extensive powers to himself, does not part with any beneficial interest, but instead creates a bare trust.7

5 A bare trust fails to achieve its intended purposes if it contains dispositive or other provisions which are to continue to have effect even after the settlor’s death. The trust assets then belong beneficially to those who are entitled to the settlor’s estate on his death, and do not pass to the beneficiaries specified in the trust instrument without probate or

other formality.8 Any purported disposition of assets held on a bare trust is testamentary. If such a disposition is to be valid, it must comply with the provisions of the relevant law on testamentary dispositions — something which in practice rarely happens.9

6 The Trust Ordinance of Hong Kong — which is modelled substantially on the English Trustee Act 1925 — is also silent on the issue of settlor’s reserved powers. However, there are signs that things may be about to change in Hong Kong. The Joint Committee on Trust Law Reform, established in 2007, seeks to modernise the trust legislation to facilitate a more effective trust administration through the use of modern investment services, address some of the uncertainties in the common law, and promote the use of Hong Kong’s trust law, especially by non-Hong Kong clients. Although the Committee’s report will only be published in 2009, it is clear that it seeks to propose several changes to the existing trust regime in Hong Kong, and deal with issues such as settlor’s reserved powers.

7 Singapore currently appears to be satisfied with occupying a middle-ground with regard to the extent of permitted settlor’s reserved powers. Section 90(5) of the Trustees Act provides that no trust shall be invalid by reason of the settlor reserving to himself any or all “powers of investment” and “asset management functions”.10 The general purpose behind the introduction of s 90 seems to be the desire to give greater recognition to, and satisfy, settlors’ intentions11— who are more knowledgeable and sophisticated, and demand a more active involvement in investment decisions.12 The introduction of s 90 was also part of a move by Singapore to modernise its Trustees Act to make it in tune “with current developments in trust law and the application of trusts in financial and business transactions in the commercial world”,13

with a view to enhancing Singapore’s position as a leading financial and wealth management centre.

8 Singapore was, however, reluctant to further expand the permissible scope of settlor’s reserved powers beyond that already spelt out in s 90(5). Instead, Singapore preferred to determine the issue of further expansion of settlor’s reserved powers “much later” when it has the opportunity to study the experiences of other jurisdictions.14 Thus, Singapore has not as yet authorised the settlor to reserve powers with regard to the distributive functions of the trust.

9 On the other hand, the offshore trust jurisdictions, in their desire to attract more wealth capital, have given statutory recognition to a much wider ambit of settlor’s reserved powers.15

10 This article first discusses the various factors driving the demand for such reservations, and the possible benefits derived from such use, before considering the policy concerns over the extent of settlor’s reserved powers. It then articulates the proper parameters that should be set for such reservations.

II. Desire for more reserved powers

11 The changing nature of trust instruments has promoted the desire for more reserved powers for settlors in modern trusts.16 Trusts are no longer restricted to their traditional functions of holding, protecting and transferring real property. Instead, modern trusts are used as investment tools aimed at enhancing the value of financial assets.

12 The modern forms of trust assets call for the settlor to devolve more options upon the trustee in the dispositive provisions of trusts,

ie, the allocation and distribution of beneficial interests.17 Extensive discretionary powers vested in the trustee encourage the settlor to reserve some powers over the trust, so that the settlor is able to, for example, alter the investment directions of the trust as economic circumstances depart from those governing the creation of the trust, or to continue to assert the settlor’s preferences over asset disbursement to beneficiaries based on the beneficiaries’ changing needs.

13 The present-day trustee, in view of his duty to invest, enjoys greater responsibility, and also discretion, in the administration of trusts. These discretionary investment powers are further expanded under legislative regimes18 which confer upon trustees a default general power of investment.

14 Moreover, the nature of modern trusts creates conflicts of interest. Settlors in modern trusts are more likely to use the trust as a device to manage the investment of various financial securities, with a view to distributing the assets to beneficiaries over time. In contrast, beneficiaries seek to obtain immediate possession of trust assets.19 The trustee’s preservation of trust assets is likely to be in accordance with the settlor’s instructions, but against the beneficiaries’ preferences.20

15 Another conflict of interest arises when trustees who are given wide discretion in investment and distribution decisions are paid based on asset value or trust transactions — prompting trustees to grow the trust value through investments and minimise payments to beneficiaries, or execute more trust transactions than are perhaps necessary.21 The increased discretion vested in trustees breeds potential grounds for trustee misbehaviour in acting against the trust interests so as to seek maximum compensation from the particular trustee fee structure in operation. This results in an adversarial relationship between the trustees and the beneficiaries. These conflicting trustee motivations in portfolio management and disbursement decisions also contribute to the frustration of a settlor’s intentions. The trustees’

decisions may be against the beneficiaries’ interests. In such a situation, the intervention of the settlor as a “referee” helps prevent, and resolve, such conflicts between trustees and beneficiaries.22 Thus, it has been observed that “perhaps a supervisory role for the settlor is nothing more than a natural extension of trust law given the newfound potential for conflicts of interest in modern trusts”.23

16 Expanding the scope of settlor’s reserved powers — thereby assuring the settlor of the trustee’s fidelity to his wishes — increases the settlor’s willingness to create a trust.24 A settlor who reserves the power of modification of trust terms is able to continually impose his financial judgment on the future investment directions of the trust assets. This is in contrast to the present legislative regimes in various Commonwealth jurisdictions, where there is no guarantee that the settlor’s express intentions indicated in the trust instrument would always be followed.

17 Scholars have also pointed to the emerging trend of trust protectors in offshore trust jurisdictions25 as a response, and also a remedy, to the settlor’s uncertainty about the future.26...

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