By James Bolton, Country Delivery Director, Cayman Islands
For many high-net-worth individuals and families, creating a trust and transferring their personal wealth into a trust structure may invoke feelings of relinquishing control over their assets, which can be a difficult step. Reserved power trusts, available under Cayman Islands law, offer a compelling solution: the ability to establish a valid trust structure while retaining a degree of influence over how assets are managed.
From guiding investment decisions to appointing new trustees, Cayman reserved power trusts offer a level of flexibility that sophisticated settlors are increasingly drawn toward.
What is a reserved power trust?
Under traditional common law, a trust may be deemed invalid if the settlor retains too much control, because it raises the risk of the trust being labeled a “sham.” But Section 14(1) of the Cayman Islands Trusts Act (2021 Revision) provides an alternate solution: certain powers can be retained by the settlor or granted to another party without compromising the trust’s validity.
These are known as “reserved powers,” and they allow settlors to stay involved in key aspects of trust management, from investments to governance, while keeping the trust itself fully compliant with the law.
A reserved power trust can reserve the power to:
- Revoke, vary or amend the trust deed
- Distribute income or capital
- Retain a limited beneficial interest in the trust fund
- Act as director of a trust-owned company
- Direct investments (e.g. buying, selling or holding property)
- Appoint or remove trustees, protectors or beneficiaries
- Change the governing law or jurisdiction
- Veto certain trustee decisions
Further, a trustee who follows valid instructions stemming from these powers will not be in breach of trust, providing an added degree of comfort to both the trustee and the settlor.
Why consider a reserved power trust?
- Comfort and continuity: For families who’ve spent decades or even centuries building wealth, especially through direct investments or operating businesses, the idea of handing over full control can be uncomfortable. Reserved power trusts allow them to remain engaged while transitioning asset ownership into a trust
- Investment oversight: The most commonly reserved power is the authority to direct trust investments. For settlors with strong financial expertise, this can ensure continuity in strategy and risk management, even as assets move into trust
- Family governance: Reserved powers allow families to introduce future generations into the decision-making process, supporting smoother succession and education around wealth stewardship
- Efficient structuring: Combined with Cayman’s widely respected legal system, tax neutrality, and robust regulatory regime, reserved power trusts become a highly effective tool for international wealth planning
Important considerations: Is a reserved power trust right for you?
As with any trust structure, reserved power trusts come with some important caveats, starting with tax implications. In some jurisdictions, retaining powers may have adverse tax consequences, so international families should seek specialist advice to preserve tax neutrality.
Finally, there is the risk of creditor exposure. If a settlor becomes bankrupt, their reserved powers could potentially be exercised by a trustee in bankruptcy, opening access to trust assets.
How IQ-EQ can help
IQ-EQ’s Cayman team has extensive experience supporting clients in establishing and administering reserved power trusts. We work closely with family offices to provide professional trustee services; support reserved power implementation; manage reporting, administration and compliance; and ensure the trust structure meets the family’s evolving needs.
Get in touch with our Cayman Islands team to explore how a reserved power trust can support your wealth planning goals.
