Reserved powers: meaning in a trust and the terms around it

The reserved powers meaning in a trust is straightforward: they are decisions the settlor keeps for themselves in the trust deed instead of handing them to the trustee. The more a settlor keeps, the less independent the trustee is, and the harder it can be to show that the trust is a real transfer of assets. This glossary defines reserved powers and the neighbouring terms you meet when you choose, assess or change a trustee in Switzerland. For the practical side, read the guide on settlor reserved powers and the trustee relationship.

A

AEOI

Automatic exchange of information, also called CRS. Financial institutions report certain account data on foreign tax residents to their tax authority, which passes it on. For a trust, the trustee has to work out how the structure is classified and who must be reported. The answer depends on the trust and on the countries involved.

AMLA

The Anti-Money Laundering Act (LBA / GwG). A Swiss trustee must identify the settlor, the beneficial owners and the origin of the assets, and keep those records up to date. It is one reason a trustee asks questions that feel intrusive at the start.

Appointment power

The power to name or remove a trustee. Who holds it matters when relations break down: it may sit with the settlor, the protector or a named person. Read it before you need it, in the step-by-step guide to changing trustee.

B

Beneficial owner

In anti-money-laundering rules, the natural person who ultimately benefits from or controls the assets. In a trust this can be the settlor, a beneficiary or a protector, depending on the powers in the deed. See beneficial owner.

Beneficiary

A person, or a class of people, who may receive income or capital from the trust. In a discretionary trust, a beneficiary has a hope of benefit rather than a fixed right. The trustee owes beneficiaries duties of loyalty, prudence and information.

C

Co-trustee

One of two or more trustees acting together under the same deed. The deed says whether they must agree unanimously or can act by majority. It spreads risk, but it can slow decisions.

Corporate trustee

A company, rather than an individual, acting as trustee. In Switzerland, a professional trustee must be a sole proprietorship, a commercial company or a cooperative, entered in the commercial register (Art. 18 FinIA). A company continues if one person leaves, which an individual cannot.

D

Deed of retirement and appointment

The document by which an outgoing trustee steps down and a new one takes over, so that the trust property passes in an orderly way. It must follow the trust deed. See deed of retirement and appointment.

Discretionary trust

A trust in which the trustee decides who receives what, and when, within the class of beneficiaries named in the deed. A letter of wishes often guides those decisions. Reserved powers sit awkwardly here, because they cut across the trustee's discretion.

E

Exculpation clause

A clause that limits the trustee's liability for certain mistakes. It does not protect against everything, and its reach depends on the wording and on the applicable law. See exculpation clause.

F

FINMA

The Swiss Financial Market Supervisory Authority. It authorises professional trustees and, together with a supervisory body, oversees them (Art. 61 FinIA). FINMA grants the authorisation; a supervisory body checks day to day that the conditions continue to be met.

FinIA

The Financial Institutions Act (LEFin / FINIG). It treats trustees as financial institutions alongside asset managers (Art. 2 para. 1 let. b). A trustee is anyone who, on a professional basis, manages segregated assets, or disposes of them, for a beneficiary or a set purpose under a trust deed within the meaning of the 1985 Hague Convention (Art. 17 para. 2).

Fixed interest trust

A trust in which the deed sets each beneficiary's entitlement, so the trustee has little discretion over who benefits. The trustee's work is mostly administration, accounts and payment on the terms set. See fixed interest trusts.

H

Hague Convention

The 1985 Hague Convention on the law applicable to trusts and on their recognition. Swiss private international law refers to it for trusts (Art. 149c PILA). The Convention also preserves mandatory rules on succession rights (Art. 15).

I

Investment direction power

A reserved power letting the settlor, or an adviser chosen by them, direct how the trust assets are invested. The trustee then follows instructions on that part of the portfolio. Whether the trustee remains responsible for the result depends on the deed and the facts.

Irrevocable trust

A trust the settlor cannot simply undo. Once assets are transferred, they belong to the trust, and the settlor's later influence is limited to the powers the deed expressly reserves. See revocable and irrevocable trusts.

L

Letter of wishes

A non-binding note from the settlor telling the trustee how they would like discretion to be used. It is guidance, not an instruction, and it should be updated as the family changes. See letter of wishes.

P

Power to add or remove beneficiaries

A reserved power that changes who may benefit. Because it can reshape the whole trust, it is often held by a protector rather than by the settlor, so that the trust keeps its independence.

Private trust company

A company set up to act as trustee of one family's trust or trusts. The family usually has influence over its board, which raises the same question as reserved powers: who really takes the decisions. See the comparison with a professional trustee company.

Protector

A person or body with oversight powers over the trustee, such as consenting to distributions or removing and appointing the trustee. A protector is a check on the trustee, not a second trustee. See protector and working with a protector.

R

Reserved portion

Under Swiss succession law, the share of the estate that certain close relatives are entitled to: half of the statutory share (Art. 471 CC). It applies to those who leave descendants, a spouse or a registered partner; parents are no longer protected heirs (Art. 470 para. 1 CC). It matters for trusts because mandatory succession rules can limit what a trust achieves.

Reserved powers

Powers the settlor keeps over the trust, rather than giving them to the trustee. Typical examples are the power to direct investments, to appoint or remove the trustee, to add beneficiaries, or to approve distributions. They are legitimate in moderation. If the settlor keeps too much, the trustee becomes a mere agent, and the trust may be treated as not genuinely independent.

An example of wording (fictional): "During the settlor's lifetime, the trustee shall not sell the shares in the family workshop without the settlor's prior written consent, which may not be unreasonably withheld." This keeps one decision with the settlor and leaves everything else to the trustee.

For the trustee, each reserved power is a duty to understand: who may use it, in what form, and what happens if the settlor loses capacity or dies. Ask for it to be recorded plainly in the deed. See what the trustee owes the beneficiaries for how those duties interact.

Revocable trust

A trust the settlor can cancel or amend, taking the assets back. The settlor's control is wide, which can weaken the protection and may change the tax and succession analysis. The result depends on the settlor's residence and the nature of the assets.

S

Settlor

The person who creates the trust and transfers assets to it. Also called constituant or Errichter. See settlor.

Sham trust

A trust that exists on paper while the settlor in practice keeps full control, treating the assets as their own. Courts and authorities may disregard it. Extensive reserved powers, used as if the trustee did not exist, are the classic warning sign.

Successor trustee

The person or company named in the deed, or chosen under it, to take over if the trustee dies, retires or is removed. Naming one in advance avoids a gap in administration. See successor trustee.

Supervisory body

A body authorised by FINMA that checks professional trustees on a continuing basis (Art. 61 FinIA). SO-FIT is one of them, active as a self-regulatory organisation for anti-money-laundering purposes and as a prudential supervisory body for asset managers and trustees. A trustee must report changes in its facts to its supervisory body in advance.

T

Trust

A legal relationship in which a settlor transfers assets to a trustee, who holds and manages them separately for beneficiaries or a defined purpose. A trust is not a legal person. Switzerland recognises foreign trusts through the Hague Convention.

Trust deed

The founding document of the trust. It names the parties, sets the trustee's powers, lists any reserved powers and says how the trustee can be replaced. It is the first document to read in any review.

Trust property

The assets held in the trust, kept separate from the trustee's own assets. The trustee manages them, keeps their value and uses them for their intended purpose (Art. 19 para. 2 FinIA).

Trustee

The person or company that holds the trust property and administers it for the beneficiaries. A professional trustee in Switzerland needs authorisation, qualified management of at least two people (Art. 20 FinIA), a minimum capital, paid in cash, set at CHF 100,000, together with appropriate guarantees or professional liability insurance (Art. 22 FinIA). It is also subject to an annual audit (Art. 62 FinIA). Activity counts as professional when it is an independent economic activity carried out to obtain regular income (Art. 3 FinIA).