Preserving wealth in a Bermuda dynastic trust

Cornelius Vanderbilt died in 1877 with legendary wealth, which his son quickly doubled, becoming the richest man on earth — yet, within a generation, the vast majority of the family’s fortune was lost.

This isn’t unusual: studies have shown that about 70 per cent of wealthy families lose that wealth by the second generation, and 90 per cent by the third.

Why is this? A lot of it comes down to the fact that, when making plans for passing on wealth, it’s difficult to foresee future changes — a child moves to a high-tax jurisdiction; an heir develops problems, marries a spendthrift or has a bad divorce, or simply proves not to be adept financially; tax laws change; stock markets crash; new inventions transform the world; pandemics and wars happen; heirs are targeted by criminals, fall under bad influence or become unwell; families fall out of political favour; disputes arise; new businesses are started; children are born…

Any arrangement that allocates property based on the circumstances at a given point in time will be unable to factor in these changes, which may have disastrous consequences.

One must add into this mix the delicate fact that sometimes the children of well-off families, when given the certainty of a large inheritance, feel no incentive to work hard, which can affect their lives negatively, as hard work can be so vital for personal development.

In fact, the greatest fear of many of the world’s wealthiest people is that if something happened to them unexpectedly, their children could inherit great wealth when unprepared or too immature to manage it.

On the other end of the spectrum, perhaps a high-achieving family has successful children who do not require an inheritance — which if received unexpectedly when resident in a high-tax jurisdiction (perhaps working or studying there for a short period) could have extreme tax consequences.

In this way, it can be seen that wealth passed on at the wrong time or in the wrong way can be a burden. Yet none of us know when we will die, or the direction our families will take afterwards; in particular, it can be difficult to gauge the later circumstances of young children in a rapidly changing world.

Additionally, many clients wish to control how assets are managed after their deaths: they may have taken a lifetime to build a business or to renovate a home and wish for these assets (which may not be easily divisible) to remain in their families and be managed in a certain way.

A dynastic Bermuda trust may be the answer. Such trusts are flexible vehicles to pass wealth sensibly down the generations.

A wide range of assets can be placed in trust — a family company (with the trustee assuming the role of shareholder), an art collection, intellectual property rights, financial investments or a family home — subject to special considerations regarding Bermuda land, which can only remain in Bermuda trusts for up to 100 years. Those considerations aside, since 2009 most Bermuda trusts do not have to be limited in duration.

Such trusts are usually discretionary, providing the trustee with the flexibility to distribute assets according to the needs of different generations of the family over time, perhaps with consent from, or in consultation with, a “protector” (a family friend or adviser).

Wealth held in professionally managed trusts does not get squandered. When making distributions, trustees will bear in mind the wishes of the person who established the trust and may consult surviving family members, and they will manage investments with advice on legal, tax and market developments from experienced professionals.

It may be that an entrepreneur wishes to avoid large distributions to his or her children to incentivise hard work. If so, assets could be retained in trust to help many generations with sensible expenses such as education, or distributed bearing in mind contributions made to the family business (with flexibility to adapt to changing circumstances such as illness).

Arguments among children can be avoided if a professional trustee is the sole shareholder of the family company or if no child is given the family home to the exclusion of others, yet the assets remain held for the benefit of the whole family.

There’s no way of foreseeing the future, but a dynastic trust can defer decisions on distributions and investments, so that such decisions can be made by experienced professionals, bearing in mind economic, tax and other circumstances as they develop over the decades.

In this way, future generations can be protected from the pitfalls of wealth, helping them to live comfortable, productive and ultimately happy lives, with purpose.

If the Vanderbilts had established a well-planned dynastic trust, perhaps the story of their family would be very different.

First Published in The Royal Gazette, Legally Speaking column, February 2024