Bermuda amends trust law firewall provisions and restores settlor’s freedom of disposition with respect to children

Changes to trust law firewall provisions

The Amendment Act amends the firewall provisions contained in sections 9 to 11 of the Trusts (Special Provisions) Act 1989 (Principal Act). The changes (a) clarify the jurisdiction of the Supreme Court in respect of Bermuda trusts and foreign trusts with a connection to Bermuda, (b) enhance and modernize the provisions of the Principal Act with regard to the application of foreign laws and foreign orders to Bermuda trusts, and (c) make consequential amendments to the Conveyancing Act 1983.

Where a Bermuda trust is properly constituted, the amended firewall provisions now have three aims:

• to protect against foreign law application relating to heirship rights, matrimonial/other familial relationship, or matters of insolvency, to the determination of any question concerning a Bermuda trust
• to exclude the application of foreign law to questions relating to the validity, construction, effects or administration of a Bermuda trust, and
• to prevent the recognition or enforcement of foreign orders in relation to property held in a Bermuda trust (with the exception of immovable property outside Bermuda), which are inconsistent with Bermuda law

More specifically the Principal Act has been amended as follows:

• a new section 1A has been added to improve certain definitions in the Principal Act such as ‘foreign court’ (to cover foreign arbitration and other tribunal determinations), ‘foreign order’ (to include interim or final judgements, awards, orders or other decisions of a foreign court), and ‘settlor’ (to include the testator of a will trust and the settlor/trustee of a declaration of trust)
• a new definition for ‘Bermuda trust’ and an amendment to section 6(2) of the Principal Act, as it has been specifically tailored to allow for the possibility that Bermuda law may apply to a severable part of a trust only—of particular importance in the context of firewall provisions
• section 9 of the Principal Act has been repealed and replaced in order to specify that the Supreme Court has the power to adjudicate claims concerning the validity, construction, effects or administration of the trust, including any of the matters set out in section 7(a)–(j) of the Principal Act. These matters include the appointment of trustees, rights and duties of trustees, powers of delegation, investment and accumulation of income, duration of the trust, relationship between trustees and beneficiaries and any liability, variation or termination of the trust and distribution of trust assets. The new section 9 enhances the provisions of the current section; for example, it provides for the express jurisdiction of the Supreme Court where the trust instrument so specifies
• section 10 of the Principal Act has been repealed and replaced. The simplified section 10 now provides for an exclusion of foreign law where appropriate as opposed to providing for a blanket application of Bermuda law, subject to exceptions. This is accomplished by specifying the circumstances under which any foreign law shall be excluded from application to a Bermuda trust. These circumstances include foreign laws relating to heirship rights, matrimonial/other familial relationship, or matters of insolvency. No foreign law that is excluded in these circumstances shall apply to the determination of any question relating to the establishment of a Bermuda trust (or the ‘launching of the rocket’) including the capacity of a settlor to settle a trust, rights/interests in property so settled, validity of disposition of property or any obligation or liability of a settlor, trustee or beneficiary of a Bermuda trust. The new section 10(3) provides that once the trust has been established (or the ‘rocket has launched’) no foreign law shall apply to the determination of any question concerning the validity, construction, effects or administration of a Bermuda trust, including any of the matters set out in section 7(a)–(j) of the Principal Act. Where the application of foreign law is excluded to that extent the court shall apply the law of Bermuda. The firewall protections afforded under the new section 10 do not apply to foreign land or in cases where foreign law has been chosen to apply to any severable aspect of a Bermuda trust in accordance with section 8 of the Principal Act
• section 11 of the Principal Act has been repealed and replaced in order to supplement the protective measures under the new section 10 by preventing the enforcement or recognition of any order of a foreign court where such order is in conflict with the provisions of the new section 11
• consequential amendments have been made to the Conveyancing Act 1983 (Bermuda’s fraudulent transfer legislation). Section 36G of the Conveyancing Act 1983 has been repealed and replaced so as to simplify the language and to allow for consistency with the updates to the firewall provisions of the Principal Act. This makes it clear that Bermuda’s fraudulent transfer legislation will not enable a creditor’s claim if the claim is precluded by Bermuda’s firewall provisions

Settlor’s freedom of disposition with respect to children

The Amendment (No 2) Act amends the Principal Act to provide freedom of disposition to a settlor of a trust in circumstances where an express intention appears in the trust instrument with respect to beneficiaries who are children of the settlor, contrary to the provisions of the Children Act 1998. It also makes consequential amendments to the Children Act 1998.

By way of background, the Children Amendment Act 2002 amended the Children Act 1998 (with effect from 2004) by including new sections 18A and 18B which abolished the distinction between legitimate and illegitimate children when construing references to such in instruments (including international trusts) and statutory provisions. While this amendment addressed the equal status of children (of particular relevance in custody arrangements, care and supervision of children) it had the consequence of restricting the freedom of settlors to dispose of private property by making it difficult, but not impossible, to exclude illegitimate (or indeed legitimate) children from trust benefits.

The Amendment (No 2) Act amends the Principal Act by inserting a new definition of ‘child’. This provides that a reference to a child or children in a trust instrument shall be construed as provided under section 18A of the Children Act 1998 (ie equal status of children), unless an express contrary intention appears in the trust instrument. Furthermore section 18B of the Children Act 1998 is amended to exclude the application of section 18A to a trust instrument in the case where the trust instrument expressly states a contrary intention, as provided under the new legislation.

The recent amendment re-asserts freedom of disposition so, like several competitor jurisdictions, settlors of Bermuda trusts may now distinguish between legitimate and illegitimate children (if they so wish) and confidently know that the beneficiaries of the trust assets are the people they have chosen. This should be particularly attractive to settlors with religious backgrounds or settlors who wish to benefit children and remoter issue (whether being legitimate or illegitimate) in different ways. This follows the position under English law and many other common law jurisdictions where there is a presumption that the expressions ‘children’ and ‘issue’ in an instrument include legitimate and illegitimate children but only in circumstances where that presumption is subject to an expressed contrary intention.