Settlor reserved powers: how much control can you keep and still have a valid trust?

Settlor reserved powers are the rights a settlor writes into the trust deed to keep a say over the trust after the assets have moved to the trustee. Almost every settlor wants some of them. The practical question is how many a trust can carry before a trustee, a bank, a tax authority or a court starts to ask whether the trust is really run by the trustee at all.

This guide is written from the trustee's side of the table. It explains how a power list in the deed is read, which powers are usually unremarkable, which ones change the relationship, and what a trustee in Switzerland will want to discuss with you before accepting the role. It is general information, not advice on your own deed.

What a reserved power is, and what the Convention allows

A trust, in the terms of the Hague Convention, is a legal relationship in which assets are placed under the control of a trustee for the benefit of a beneficiary or for a stated purpose. The assets form a separate fund, title is held in the name of the trustee, and the trustee has a duty to manage and to account. That description is found in Article 2 of the Hague Convention of 1985 on trusts.

The same article adds a point that matters here: the fact that the settlor reserves certain powers, or that the trustee is also a beneficiary, is not by itself inconsistent with the existence of a trust. So the principle is settled. A settlor may keep something. What the Convention does not do is tell you how much. That line is drawn by the governing law of the trust, by the wording of the deed, and by how the trust is actually run from year to year.

For a settlor, the useful way to think about it is this. Each power you keep is a decision the trustee no longer takes alone. The more decisions you keep, the more the trust depends on you personally, and the less it looks like a structure in which a trustee holds title and answers for the result.

Reserved powers are not the same as a protector's powers

Both a settlor and a protector can hold powers over a trustee, and the two are often confused. A reserved power belongs to the settlor, is usually written into the deed from the start, and ends or changes only as the deed says. A protector is a separate office-holder, often an independent person, whose role is to check or consent. If you are weighing the two, the page on working with a protector covers the daily practice. For the formal definition of the settlor's side, see the glossary entry on reserved powers.

The power list in the deed: where a trustee starts

When a trustee reviews a new or inherited trust, the first document read is the trust deed, and within it the section that lists what the settlor kept. It may be called "reserved powers", "powers of the settlor" or simply sit in a schedule. A trustee will read that list line by line, because each line answers three questions:

• Who decides: the settlor alone, the trustee alone, or the trustee with the settlor's consent?
• Can the trustee refuse, and on what grounds?
• Does the power survive the settlor's incapacity or death, and who then holds it?

A list that answers those questions clearly is a good sign. A list that says only "the settlor may give directions to the trustee" without any limit is the opposite: it leaves the trustee unsure whether it is a trustee or an agent.

A table of common reserved powers

The table below sets out the powers that appear most often, how a trustee tends to treat them, and the practical effect. It is a reading aid, not a ranking that applies to every deed.

A trustee who sees several heavy entries in one deed will not necessarily decline the appointment. It will, however, ask for a conversation before it signs, and it may propose changes. That conversation is the point of a good first meeting, and it is easier to have before the trust is set up than after.

Reserved powers from light to heavy

The diagram below places typical powers on a scale from light to heavy. The scale is a qualitative reading of how far each power moves decision-making from the trustee to the settlor. It is not a measurement, and the same power can weigh differently in two deeds depending on its wording.

Two observations help when you read the scale. First, the weight of a power rises with how little the trustee can do about it. A power to give directions that the trustee may decline for good reason is much lighter than the same power with no right of refusal. Second, powers add up. One heavy power in an otherwise balanced deed is a different picture from three heavy powers held by the same person.

A worked example: a settlor with investment power

Take an illustration. A founder based in Lausanne, whom we will call Mr Favre, settles a trust with a Geneva trustee. He has spent his career managing his own money and does not want to hand over the portfolio. The deed therefore says that the trustee will follow the settlor's investment instructions.

At the first meeting, the trustee does not say no. It asks how the clause is meant to work. Four points come up.

Who is accountable for a bad outcome? If the settlor instructs a purchase and it loses value, the beneficiaries may still look to the trustee. A clause that says the trustee is not liable for following the settlor's instructions helps, but only to a point, and only if the instructions are lawful and the settlor is not misled. The trustee will want the deed to say exactly what protection applies. See the glossary entry on the exculpation clause for the general idea.

Does the trustee keep a veto? A sound mechanism usually lets the trustee refuse an instruction that is illegal, that conflicts with the interests of the beneficiaries, or that falls outside a stated investment policy. Without a veto, the trustee is a conduit.

What happens if Mr Favre becomes unable to act? Investment power exercised by one person for decades has to pass to someone when that person is ill or has died. A deed that is silent leaves the trustee with a portfolio and no instructions, or with an uninvited successor.

Is the power personal or is it delegated to an adviser? A settlor who wants advice may name an investment adviser instead of acting alone. This is often a better design: the trustee deals with a professional who is accountable for the advice.

The outcome in this example is a compromise. Mr Favre keeps a meaningful say over investments, but through an investment policy statement that sets the limits, a trustee that may refuse out-of-policy instructions, and a named successor for the power. He keeps influence without turning the trustee into an order-taker. Details of the mechanics for a trust that holds more complex assets are covered in the page on day-to-day trust administration.

Where too much control becomes a problem

A trust is valued for the separation it creates between the assets and the person who gave them. Reserved powers pull against that separation. The risk is not that any single power is forbidden. The risk is that the total picture stops looking like a trust.

The trust may be treated as a sham or as not genuinely held

If the settlor can in practice do whatever he or she likes with the assets, and the trustee only signs, a court or another authority may conclude that the trustee never really had control. The Convention's own description of a trust speaks of assets under the control of a trustee, with title in the trustee's name and a duty to manage and to account. A structure in which those elements are missing in substance is open to challenge, whatever the deed says on paper. How the trust is run counts as much as what it says.

For that reason, a trustee in Switzerland will look at conduct as well as wording. Minutes of decisions, records showing that the trustee considered an instruction before acting on it, and evidence that the trustee has refused or amended an instruction at least on occasion all help show that control is genuine.

Heirs may challenge the transfer

Swiss succession law protects certain close relatives by a compulsory share, the reserve. Under Article 471 of the Civil Code the reserve is half of the statutory entitlement. Under Article 470, paragraph 1, it applies to a person who leaves descendants, a spouse or a registered partner; parents are no longer among the reserved heirs. These rules come from the succession law revision that entered into force on 1 January 2023, and the Federal Office of Justice presents the revision as allowing people to dispose freely of a larger part of their estate. The official summary is on the Federal Office of Justice page on the revised succession law.

For trusts, the relevant link is that trusts fall under Article 149c of the Private International Law Act, which refers to the Hague Convention for the applicable law, while Article 15 of the Convention keeps mandatory rules on succession rights in place. In plain terms: a trust does not make the compulsory share disappear. A settlor who keeps heavy powers until death may find that the assets are treated as part of the estate for these purposes, which can matter to heirs. A change to the Private International Law Act on international successions enters into force on 1 January 2025, as set by the Federal Council on 26 June 2024. Whether any of this affects you depends on your residence, nationality, the location of assets and the law governing the trust, which is why it needs individual analysis rather than a general rule. The question of where to establish the trust is a separate topic and is not covered here.

Money laundering rules look through to the person in control

A Swiss trustee that is a financial intermediary must verify the identity of its contracting party when it enters into a business relationship, on the basis of a supporting document. That is Article 3 of the Anti-Money Laundering Act. Article 2 of the same Act describes non-operating legal entities as including trusts and similar relationships not set up to run or support a commercial activity, and the revision of the Act provides for a category of advisers who become subject to its rules. The Act is summarised in the official page on money laundering and transparency.

What this means for reserved powers is practical. A trustee will ask who actually controls the structure. A settlor who keeps wide powers is, in many cases, a person who must be identified as exercising control, and the trustee's file will record that. This is not a reason to avoid reserved powers. It is a reason to expect questions and to answer them openly. The duties are laid out in more detail on the page on compliance and reporting.

Revocable and irrevocable trusts: where the line sits

The balance of reserved powers is different in a revocable and an irrevocable trust. In a revocable trust the settlor can take the assets back, so a long list of settlor powers is natural; the trust is closer to an arrangement for management and for continuity. In an irrevocable trust the settlor has given up the assets, and heavy reserved powers sit awkwardly with that gift.

A trustee will therefore check that the label on the trust and the powers in the deed agree. A deed that calls itself irrevocable but gives the settlor power to direct distributions, change beneficiaries and take assets back is internally inconsistent. The label may not survive scrutiny, and any consequence attached to the label may fall with it. The page on the trustee's role in revocable and irrevocable trusts explains how the two are administered differently.

Which tax or legal consequences follow from the label depends on the countries involved, and those questions belong to a tax adviser familiar with your situation.

Keeping control without weakening the trust

Many settlors want comfort more than control. They want to know the trustee will not do something they would never have wanted. There are several ways to achieve that without heavy powers.

1. A well-kept letter of wishes. It records your intentions and gives the trustee something to weigh. It is not binding, which is exactly why it is light.
2. An independent protector. A person who can veto certain decisions or remove the trustee gives you a check without putting your own hand on the controls. The comparison is set out in trustee with or without a protector.
3. A consent requirement instead of a direction power. The trustee proposes and the settlor or protector approves. The trustee remains the decision-maker and the approver can stop a step.
4. A power to replace the trustee. This is a strong lever, because a trustee who knows it can be replaced will listen, and it leaves the day-to-day decisions with the trustee. The practicalities of a handover are described in changing trustee step by step.
5. A defined investment policy. If you want a voice on investments, put it in a written policy rather than in an open-ended power.

None of these removes the need to think about succession of the powers themselves. Every power you hold should have a named holder after you.

Questions a trustee will ask about your powers

Before accepting a trust with reserved powers, a careful trustee will usually raise the following. It is worth preparing answers before the first meeting.

• Which powers do you want to keep, and what is each one for?
• Is each power exercised alone, or only with the consent of another person?
• May the trustee refuse an instruction, and on what grounds?
• Who holds each power if you are ill or have died?
• Does any combination of powers allow you to take back the assets or decide who receives them?
• Is the trust revocable or irrevocable, and does the deed match that description?
• How will decisions and refusals be recorded?
• Is any protector independent of you?

A deed that answers these points is easier to administer and easier to defend. If you are comparing candidates, the due diligence guide shows what to ask a trustee in return.

The relationship once the trust is running

Reserved powers shape the relationship as much as the paper. A settlor who uses a power sparingly and records the exercise builds a record that the trust is working as intended. A settlor who instructs the trustee on every matter, informally and by telephone, gradually turns the deed into a fiction.

A trustee in Switzerland will usually propose a rhythm: instructions in writing, a short note of the trustee's own view, a decision recorded, and an annual review of whether the powers still suit the family. If the powers have become heavier in practice than on paper, the review is the time to say so and to adjust the deed or the habits. The related page on the yearly compliance review describes what such a review covers. If a dispute develops, whether between the settlor and the trustee or between beneficiaries and the trustee, the page on beneficiary disputes sets out how those matters tend to unfold.