Purpose trusts: Bermuda’s answer to modern asset structuring

Introduction

Purpose trusts represent a notable development in modern trust law, particularly within offshore financial jurisdictions such as Bermuda. Unlike traditional private trusts, which are established for the benefit of identifiable beneficiaries, purpose trusts are created to achieve specific objectives or purposes. Historically, common law jurisdictions were reluctant to recognise such arrangements due to the absence of beneficiaries capable of enforcing the trust. However, legislative reforms in Bermuda have significantly expanded the scope of trust law by expressly validating noncharitable purpose trusts. Through the enactment of the Trusts (Special Provisions) Act 1989 (‘the 1989 Act’), Bermuda introduced a statutory framework that allows trusts to exist for defined purposes, provided certain legal requirements are satisfied. This innovation has made Bermuda a leading jurisdiction for the establishment of purpose trusts, particularly in the fields of international finance, corporate structuring and private wealth management. This article examines the legal foundations of purpose trusts under Bermuda law, focusing on their historical development, statutory framework, requirements for validity, enforcement mechanisms and practical applications.

The concept and history of purpose trusts
in Bermuda

Under common law trust law principles, the general rule is that for a trust to be valid the ‘three certainties’ must be present:

• the intention of the settlor to create a trust;
• certainty as to the property to which the trust attaches; and
• certainty as to the objects (persons) who are intended to benefit.

With regard to the certainty of objects, a trust must generally be for the benefit of individuals, or be within the class of gifts for the benefit of the public which the courts recognise as charitable.¹ However, questions can arise as to the validity of trusts that are not for the benefit of human individuals, but for the furtherance of abstract objects (eg, the maintenance of good understanding between nations), or, for example, the construction or maintenance of monuments, or the upkeep of animals.

The overriding feature of a purpose trust is that it does not have beneficiaries; rather, the trustees hold the trust property for a specific and defined purpose. In the leading case in England and Wales concerning the validity of trusts for non-charitable purposes (Re Denley’s Trust Deed [1969] 1 Ch 373) a trust of land “to be maintained and used as a recreation or sports ground primarily for the employees [of a certain company]”, where the trustees had the power to allow other persons to use the land, was upheld. There has been much judicial and academic discussion on the basis upon which the trust in Denley was upheld, but the preferred view is that English law does not recognise purpose trusts simply because there are individuals capable of seeking the enforcement of the terms of the trust, but there is a further requirement that there are ascertainable individuals who would be entitled to the trust property in default if the stated purpose failed.² The present position in England and Wales is that non-charitable purpose trusts are only valid in very limited circumstances.

By contrast, Bermuda and other offshore jurisdictions, with an eye to commercial pragmatism, have put purpose trusts on a statutory footing.³ The concept was introduced primarily to respond to the need for a trust to be able to fulfil a useful role in a commercial setting – that of the role of insulator. However, it can also be used for philanthropic purposes and estate planning purposes such that Bermuda’s trust laws have developed beyond the strict confines of traditional trust law to offer greater flexibility for succession and tax planning. The 1989 Act refined the law relating to trusts created for non-charitable purposes by requiring the following conditions to be satisfied:

• The purpose or purposes of the trust must be sufficiently certain to allow the trust to be carried out; and
• The trust must be lawful and not be contrary to public policy.

Under Bermuda law, a purpose trust may last indefinitely or for a specified term of years.

An amendment to the 1989 Act in 2009 did away with the statutory requirement for an enforcer to be appointed to enforce the purposes of a trust so that, essentially, any person that the Court determines has a ‘sufficient interest’ in the enforcement of the trust may apply to Court to enforce the trust.

The trust deed may provide for the appointment of an enforcer, which is a role that is similar to that of the protector. However, the appointment of an enforcer to enforce the trust and provide for the appointment of successors is not a requirement in purpose trusts governed by Bermuda law. The 1989 Act provides the settlor, a trustee, or any person with a sufficient interest in the trust, the power to make an application to the Court to enforce the purpose trust. In default of any other arrangements, the final power of enforcement rests with the Attorney General.

The question of whether a Bermuda law ‘mixed purpose’ trust of both non-charitable and charitable purposes was void has been considered by Bermuda’s Supreme Court.⁴ The Court held that on a proper interpretation of the Act, so-called mixed purpose trusts are not void on the grounds that they contain mixed non-charitable and charitable purposes.⁵

Practical application of purpose trusts

Private Trust Companies

Purpose trusts are frequently used in conjunction with Private Trust Companies (PTC). By establishing a purpose trust to hold the shares of a PTC, the settlor is separated from direct ownership of the trustee entity that administers a family trust. Unlike individual trustees, a corporate trustee does not require replacement upon the death or resignation of a director, ensuring continuity.

Typically, a licensed trust company establishes the purpose trust by declaration, with its sole purpose being to hold the shares of the PTC. A PTC may be formed with nominal share capital and is not generally intended to generate income or charge for its services.

It is possible for family members to serve on the board of the PTC. In addition, senior personnel from a licensed service provider or corporate directors supplied by a licensed trust company may be appointed. This enhances governance, diversity and local regulatory expertise, particularly within Bermuda’s established trust business environment.

A PTC may also serve to insulate a licensed trustee from risks associated with directly holding shares in trading companies or high-risk investments.

Security (collateral) trusts

Purpose trusts are frequently used to hold collateral or security. The trust deed defines the conditions under which security may be released.

These types of security trusts, sometimes referred to as collateral trusts, are often seen to provide more accessible, cost-effective, bankruptcy-remote and independently managed security arrangements in comparison to letters of credit, funds-withheld arrangements and pledge arrangements. With an insurance market rivalling London and New York, and being the jurisdiction of domicile of more captive insurers in the world than any other, Bermuda has deep expertise in these types of trusts.

The purpose trust may be established as a collateral fund arrangement under which the trustee of a purpose trust will issue a guarantee or undertake an indemnity obligation in favour of a counterparty to the person who establishes the purpose trust (settlor). The settlor may fund the purpose trust fully in respect of its exposure under the guarantee or indemnity to be issued by the trust.

Alternatively, the settlor may only fund the trust in respect of part of its exposure on the basis that the trust fund will be invested in high-grade zero-coupon bonds or fixed interest securities with profits and gains rolling up inside the trust fund with the intention that over time these retained profits and gains together with the trust capital will match the exposure under the guarantee/indemnity or other obligation. In these circumstances care will need to be taken to expressly limit the trustee’s personal liability.

Alternatively, the trust may only be funded with sufficient monies to purchase insurance cover in respect of its exposure if any claim is made under the guarantee indemnity or other obligation. The trust will operate as a limited recourse vehicle so that the guarantee or indemnity obligation can only be met and satisfied out of and to the extent of monies or assets in the trust fund. Until a claim is made under the guarantee or indemnity or the primary obligation that is secured by the purpose trust is otherwise discharged, the trust cannot be revoked and will be insolvency-remote. At the end of the trust period any monies or assets remaining in the trust can be repaid to the settlor.

Sinking fund and reserve trusts

Purpose trusts enable assets to be dedicated to specific commercial objectives without any person being entitled to claim a direct ownership interest in the trust or prevent application of the monies or assets towards the specified purpose.

They are frequently used to create sinking funds, allowing companies to set aside funds over time to meet defined costs, such as:

• major building repairs;
• decommissioning expenses; and
• environmental remediation.

Similarly, companies may use purpose trusts to establish reserve funds for anticipated obligations, including pension top-ups or long-term liabilities. Provided no vitiating factors exist at establishment, such funds may be ring-fenced from general creditor claims unrelated to the trust purpose.

Divestment of debt obligations

A subsidiary finance company may have issued debt instruments supported by a guarantee from its parent company in favour of the holders of those debt instruments. The terms of the debt instruments may prevent early repayment and accordingly the finance subsidiary may wish to divest itself of the direct obligation to meet repayment of the debt instruments in order to improve the group’s credit rating and simplify accounts presentation perhaps in preparation for entry into another financing transaction or parent group acquisition.

In this scenario, the subsidiary finance company may form a purpose trust with an independent trustee and arrange sufficient funding to enable the purpose trust to cover interest and ultimately capital repayment obligations on the debt instruments. With the agreement of the paying agent/trustee of the debt instruments, the obligations of the subsidiary finance company may be transferred to the trustee of the purpose trust. The contingent liability of the parent company under the supporting guarantee may also be capable of being released at this point so as to remove it from the consolidated balance sheet liabilities of the group.

Private investment funds

A purpose trust structure may be used as an alternative to a traditional unit trust structure where investors or capital providers are beneficiaries of the trust and have a proprietary interest in the underlying investments.

The trustee of the purpose trust may issue participation notes to investors or capital providers who, in contrast to the unit trust arrangement, would not participate as beneficiaries under the trust but will have the contractual rights set out in the terms of the participation notes. These contractual rights may consist of the right to participate in the profits from the underlying investments.

Investors and other capital providers can rank equally for participation in the arrangement or participation notes can be investor-specific with different rights or entitlements conferred between investors/capital providers. For example, income and revenue profits can be split from capital profits and allocated to different investors.

Directors’ run-off insurance trusts

Boards of directors often fail to put in place arrangements to fund a reserve for insurance premiums which need to be paid following the acquisition of their company in a takeover or sale, or where it ceases operation, in order to provide runoff insurance cover for themselves in respect of risks arising from acts and omissions carried out by individual directors or the board prior to the takeover or sale or liquidation of the company. Company law generally permits the company to pay the premiums on directors’ and officers’ insurance policies. Failure to fund a reserve by the company for premiums which will need to be paid at or following takeover, sale or liquidation often means that if the directors want the protection of run-off cover, they will have to purchase the same from their own resources.

However, by establishing a purpose trust the board can arrange for a contingency or reserve fund to be built up by transfers of monies from the company to the purpose trust to be used for the purchase of runoff insurance policies. The funding may be by means of one lump sum payment by the company or may be spread over a period of time by means of a series of smaller payments into the trust. If the company subsequently becomes insolvent, the trust fund should be available to ensure that adequate insurance cover is purchased post the winding-up date to cover the ongoing risk of claims to which directors may be exposed during limitation periods which may run for several years after the winding-up date. Care will need to be taken to structure the trust so that it is insolvency-remote and cannot be challenged by creditors of the company.

Alternatively, if a company is sold as a going concern and becomes part of a new corporate group, it is normal for the group insurance arrangements of the acquiring group to cover the directors of the new subsidiary for directors’ and officers’ risk, but only in respect of risks arising after the date of acquisition of the new subsidiary. The directors of the subsidiary may not be covered under the new parent group’s insurance for risks which predate the acquisition. By using a purpose trust to build up a reserve fund in advance of the takeover or sale, the board of the target company can arrange purchase of appropriate run-off cover without having to pay for the same from their own resources.

Voting trusts

Voting trusts are a well-established commercial application of trust structures. For example, in a joint venture between two equal shareholders, a minority ‘voting-only’ stake may be held by a purpose trust. These shares carry voting rights but no economic entitlement. Voting decisions are exercised by an independent third party agreed upon at formation, thereby reducing the risk of deadlock in the joint venture.

Partnership and joint venture buy-out trusts

Purpose trusts may support the death of a partner or joint venture investor. Upon the death of a partner or investor, insurance proceeds held by the trustee enable surviving partners to acquire the deceased’s interest, preserving business continuity and avoiding forced asset sales.

Philanthropy

Where a settlor wishes to establish a vehicle to promote certain interests or objectives that may be business-related or philanthropic in nature, but fall outside the definition of charitable activities, it may not be possible to establish the vehicle as a charity in the settlor’s jurisdiction. An alternative approach would be to set up a purpose trust under which there is freedom to define the specific objectives which are to be promoted subject only to the overriding requirement that the purpose trust cannot be established for purposes which are unlawful, immoral or contrary to public policy.

Research and development trusts

Commercial enterprises increasingly use purpose trusts to fund research and intellectual property development.

For example, a company may lend funds to a special purpose vehicle owned by a purpose trust. The special purpose vehicle conducts research and development activities. Because research expenditure may not satisfy asset recognition criteria, this structure may allow the originating company to avoid carrying such costs directly on its balance sheet, depending on accounting treatment.

Industries utilising such structures include:

• pharmaceuticals;
• aviation and aerospace;
• mining exploration; and
• technology and electronics.

Bermuda as a trust jurisdiction

Bermuda is widely regarded as one of the leading jurisdictions for establishing purpose trusts. It enjoys a first-class reputation as an offshore centre for trusts, and has a favourable and well-respected legal and regulatory regime and a robust professional services industry. Its popularity arises from a combination of modern legislation, legal certainty, flexibility in trust structures, indefinite duration, strong, judicial oversight, effective enforcement mechanisms, confidentiality and a tax-neutral environment.

Appeals from Bermuda’s Supreme Court are ultimately heard by the Privy Council in the United Kingdom. Also, some of the most well-known legal, accounting and trust administration service providers can be found in Bermuda. Each are highly capable with the setup, management and administration of trusts. All of which combine to make a jurisdiction that is highly professional and able to meet the requirements of the most sophisticated clients.

The Trusts (Regulation of Trust Business) Act 2001 introduced an extensive system of trust licensing regulated by the Bermuda Monetary Authority and, in particular, requires that all public trust companies possess an unlimited trust licence. The Bermuda Monetary Authority screens and continually monitors licensed trustees to ensure that they are controlled by fit and proper persons, meet minimum net asset requirements, have adequate insurance, records, systems and controls and also that they carry out their business with integrity and skill.

In Bermuda there are no taxes on profits, income or dividends, nor is there any capital gains tax on trusts. There is nominal stamp duty on certain trust documents where the trust fund holds non-Bermuda property. There are a number of exemptions available from stamp duty for trusts of non-Bermuda property executed by a local trustee, pension trusts and trusts to which an international business is properly a party. An exempted party would be properly a party when, for example, it acts as trustee or settles property into a trust. The position is different where the settlor is a Bermudian national or where the assets are Bermuda dollar assets.

Conclusion

In conclusion, purpose trusts under the laws of Bermuda represent a sophisticated development of traditional trust law and illustrate how modern trust legislation has evolved to accommodate increasingly complex commercial and wealth-structuring needs. By placing non-charitable purpose trusts on a clear statutory foundation and refining the regime through legislative reform and regulatory oversight, Bermuda has created a framework combining flexibility, certainty and commercial practicality. This legal innovation has made purpose trusts particularly valuable in areas such as structured finance, corporate ownership arrangements and philanthropic initiatives. While issues relating to enforcement and accountability remain important considerations, the statutory mechanisms available under Bermuda law provide sufficient oversight to ensure that trustees carry out the intended purposes of the trust. As international financial structures continue to evolve, purpose trusts are likely to remain an influential and widely used feature of Bermuda’s trust law landscape.

1 For example, the prevention or relief of poverty, the advancement of education, or religion, sport etc.
2 Lewin on Trusts, 20th Ed.
3 In addition to Bermuda, purpose trusts have also been validated by legislation in Belize, Cayman Islands, BVI, Guernsey, Isle of Man and Jersey. It has also been held in Canada, on the basis of case law derived from Re Denley, that non-charitable purpose trusts may be created as long as there is some person with standing to enforce the trust.
4 Wong, Wen-Young v Grand View Private Trust Company Ltd and others BM 2022 SC 045.
5 An appeal on this point, among others, was heard by the Court of Appeal in January 2025; judgment is awaited.

First Published in The International Family Offices Journal – Globe Law and Business – April 2026