This overview is intended to provide broad information as to trusts in Bermuda.
As a British Overseas Territory, Bermuda has a familiar and reliable legal system based on English common law, supplemented by a modern and commercial statutory framework. A tax-neutral jurisdiction, Bermuda has a reputation for robust yet balanced regulatory oversight and is home to the world’s third largest insurance and reinsurance market. Bermuda is a highly-respected jurisdiction for compliance and transparency. Bermuda offers a first-class domicile for companies.
What is a Trust?
A trust is a legal relationship and not a separate legal entity. Instigated by the person wishing to create the trust (settlor or grantor) and the trustees (the persons willing to undertake the office of trustee), as part of this relationship specific property (trust fund) is declared to be held by the trustees for the benefit of certain parties (beneficiaries) or for certain purposes.
A trust has the following characteristics:
- The assets constitute a separate fund and are not a part of the trustee’s own estate.
- Title to the trust fund stands in the trustee’s name, or in the name of another person on behalf of the trustee.
- The trustee has the power and the duty, in respect of which they are accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust, and the special duties imposed upon them by law.
Who can create a Trust?
A person who creates the trust is called the settlor or the grantor and can be any adult individual (i.e. a person over 18 years of age). Corporations can also act as settlors or grantors. The identity of the settlor or grantor will not always be apparent on the face of the document constituting the trust, for instance, where a trust is created solely by the trustee.
What is a Protector?
It is not uncommon for the trust deed to provide for the appointment of a protector. There is no statutory definition of a protector; the function of a protector and his duties and responsibilities are essentially whatever the trust deed provides, but almost invariably the protector will be given the power to appoint and remove trustees and, perhaps, to change the law which governs the trust. There may also be a requirement for the trustees to obtain the protector’s consent before exercising certain powers conferred on them (for example, powers to add or remove beneficiaries, to appoint investment managers, to declare an early termination date and so forth) or to act in accordance with directions given by the protector.
The protector is often a close friend or professional adviser of the settlor or grantor, and should be familiar with the circumstances and needs of the beneficiaries, the family background and dynamics, and the wishes of the settlor or grantor. The protector may be an individual or a committee, or combination of individuals, or a corporation.
Uses of Trusts
Trusts can be used in a multitude of ways, with each form of trust having distinct advantages depending on the nature and complexity of the client’s business, and the situation at hand.
A purpose trust is a trust set up to fulfil purposes as opposed to one set up for the benefit of beneficiaries. The concept was conceived, primarily in response to the need for a trust to fulfil a useful role in a commercial setting, the role of insulator. Hybrid trusts, which have defined purposes as well as identifiable beneficiaries, may also be utilised in order to achieve particular objectives.
Certain conditions must be satisfied when establishing a purpose trust:
- The purpose, or purposes, of the trust must be sufficiently certain to allow the trust to be carried out.
- The trust must be lawful and must not be contrary to public policy.
- It is usual to provide that a purpose trust last either indefinitely or, for a specified term of years.
- The trust deed will usually appoint 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 as the statute gives 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 trust. In default of any other arrangements, the final power of enforcement rests with the Attorney General.
A discretionary trust is the most common form of trust established in Bermuda. It should be contrasted with a “fixed interest trust” settlement under which the interests of the beneficiaries are precisely delineated and quantified.
A principal feature of a discretionary trust is that none of the trust’s beneficiaries has a legally enforceable right to any part of the trust property. Whether or not a beneficiary receives a benefit under the trust is generally a matter for the trustees’ unfettered discretion.
The advantages of a discretionary trust are essentially two-fold:
- The flexibility, which such a trust confers, allows the trustees, in the exercise of their discretion, to take into account factors that were not foreseen at the time of the trust’s creation. Such flexibility also enables the trustees to protect the trust fund from dissipation by spendthrift beneficiaries, or from the claims of their creditors.
- Because none of the beneficiaries has a legally enforceable interest or entitlement to any part of the trust fund, discretionary trusts may offer protection from creditors and may have beneficial tax consequences in the country of domicile, residence or citizenship of the beneficiary.
Reserved Power Trusts
A settlor of a Bermuda-law trust may reserve for himself, or grant to any other person (such as a protector), any limited beneficial interest in the trust property or certain powers. Such powers include, but are not limited to, the power to revoke the trust in whole or in part, the power to vary or amend the terms of a trust instrument or any of the trust’s purposes or powers arising thereunder, and the power to appoint, add, remove or replace any trustee, protector, enforcer, or any other office holder or adviser. Bermuda law expressly provides that a settlor’s reservation, or granting of powers, does not invalidate the trust, or prevent the trust taking effect in accordance with its terms, or cause any or all of the trust property to be part of the estate of the settlor.
Bermuda played a leading role in the development of insurance trusts by having major insurance companies sell US dollar denominated life and annuity policies to non-US and US persons. Many of these policies are owned by trusts created by the insurance companies in order to characterise them as investment products rather than insurance.
In addition, trusts are also being created by individuals to buy and hold individual life or annuity policies. Persons who are concerned about asset protection, political risk, forced heirship or other family tax or investment reasons are purchasing these policies. US persons who buy insurance policies owned by trusts drafted to meet US tax requirements are able to achieve considerable tax planning and asset protection benefits particularly where the policy is issued by a company having segregated accounts.
Trusts for Tax and Estate Planning
Trusts were originally valuable tax and estate planning tools available to a broad range of potential clients who, by transferring assets to trustees located in a jurisdiction such as Bermuda, could mitigate the burden of taxation in their country of domicile or residence on death.
Except in those cases where the law of the home jurisdiction imposing the tax dictated otherwise, the trust usually took a discretionary form (see Discretionary Trusts above). Provided appropriate precautions were taken directed at distancing the settlor from control and benefit of the assets placed in the trust, the offshore trust offered tax and estate planning opportunities.
While those opportunities for some clients have been progressively reduced by legislative measures taken in the United States, Canada, the United Kingdom and elsewhere, they still exist particularly for those whose domicile, residence or even citizenship are prospectively in transition; those whose families are scattered abroad or at least resident elsewhere; and those whose principal motivation is not the avoidance of taxation, but the desire to dispose of one’s estate on death freely and without regard to forced heirship laws. In addition, the trust is an appealing estate planning vehicle for individuals in civil law jurisdictions where the trust concept is relatively unknown.
Asset Protection Trusts
Asset protection can mean many things, protection from exchange controls, taxation or expropriation, by way of example, but the term is more commonly used in a legal context, to mean protection from one’s creditors. It may be possible to achieve such protection by transferring assets to a trust, or to a company owned by a trust, established in a suitable offshore location.
Asset protection trusts are a fashionable product in the offshore world. Bermuda is not an “aggressive” asset protection jurisdiction; however, it has taken a conservative position about following other jurisdictions, which have legislated in this area. Any validly created trust has inherently protective qualities. Bermuda has its own version of asset protection legislation, in order to bring certainty to the law pertaining to the rights of creditors with respect to property that is transferred into trust.
In general terms, the legislation of certain other common law jurisdictions has severely restricted the rights of creditors, being defined as those to whom there is an obligation to pay a sum of money. Bermuda established a reasonable balance between the interests of the well-intentioned individual, with those of the individual’s legitimate creditors. Unlike other jurisdictions that have legislated in this area, Bermuda has not foreclosed on all future creditors. Instead it adopted the concept of the “eligible creditor” who is entitled within two years of the disposition to challenge a transfer (to a trust) of an asset below market value with the main intention of defrauding creditors.
Employee Benefit and Pension Trusts
It is popular in Bermuda to establish a trust to house a pension fund, or to act as a vehicle for a savings or severance scheme, or to facilitate stock purchase by employees. The advantages of using a trust in this way include the ability to pay benefits in any currency, and free of taxes in Bermuda.
Trusts as Security Devices
Because an essential feature of a properly established trust is that the trust fund is kept completely separate from both the trustee’s and the beneficiary’s assets, it can be used to provide or enhance security, particularly in a commercial context. For example, a trust can be used to create a secure sinking fund to finance large future expenditures, such as the replacement of oil drilling rigs, environmental land reclamation after working on a mine, or major repairs to a building.
Who can serve as Trustee?
There is no requirement for trustees to be resident in Bermuda, although there may be stamp duty implications if no trustee is resident in Bermuda. There may also be other benefits to having a Bermuda trustee, for example to ensure that the provisions of Bermuda legislation are applied to protect the trust assets. Individuals, public trust companies or private trust companies are eligible and most commonly serve as trustees. The differences are as follows:
A settlor or grantor may have, as one of his trustees, a relative, trusted friend or adviser, or may choose his trustees from his bank or other professional personnel. Ordinarily, care should be taken to avoid appointing someone as a trustee who is also a beneficiary of the trust, even where the trust document itself does not expressly prohibit this appointment. Care must also be taken not to contravene the trust licensing rules.
Public Trust Companies
In an international setting, the trustee is usually one of Bermuda’s licensed trust companies, acting either alone or with one or more individual co-trustees. Public Trust companies are licensed and regulated by the BMA and must also comply with general policy directions issued by the Ministry of Finance.
Private Trust Companies
A private trust company is expressly authorised by its objects to act as trustee of a special trust or class of trusts, for instance, the “ABC Trust”. A private trust company is generally exempted from the Bermuda licensing regime. However, in some instances some companies may require licences and so advice should be taken on a case-by-case basis.
How Long can a Trust Last?
The Perpetuities and Accumulations Act, 2009 (Act), states that the rules against perpetuities and excessive accumulations do not apply in relation to instruments taking effect on or after 1 August 2009, except to the extent that the instrument, or power of appointment, relates to land in Bermuda. Accordingly, it is possible to create a perpetual trust. Therefore, a Bermuda trust may be used to “tie up” property (except Bermuda land) indefinitely, permitting persons, including wealthy families to establish perpetual dynastic Bermuda trusts that may be more beneficial from an estate and tax planning perspective. The Act is not retrospective but does contemplate that a trustee, or other interested party, may wish to apply to the Bermuda courts to extend the trust period of a pre-August 2009 trust to more than 100 years. The Act also abolishes restrictions on accumulation of income by trustees allowing trustees to accumulate trust income for such period as they think appropriate, given the particular needs of the trust in question. A charitable trust can be drafted so as to have the theoretical possibility of lasting indefinitely. A non-charitable purpose trust can also have an indefinite life, however, a term of years can be stipulated. A registered pension trust may also have an indefinite life.
Taxation in Bermuda
Bermuda imposes no taxes on profits, income or dividends, nor is there any capital gains tax on trusts. There is a nominal stamp duty on certain trust documents where the trust fund holds non-Bermuda property. The position however, is different where the settlor is a Bermudian national or where the assets are Bermuda dollar assets.
Stamp duty does not apply to pension trust funds which are registered under the Pension Trust Funds Act 1966, and trusts of non-Bermuda property which are executed by a local trustee. Settlements, where an international business (such as an exempted company acting as a trustee) is properly a party, are exempt. Transactions in shares in Bermuda exempted companies are also not subject to stamp duty.
Bermuda’s legal position with respect to its law and limitation periods is conservative but also attractive to clients wishing to embark on asset diversification and ownership as part of an overall estate planning exercise. Bermuda’s sensible and responsible regulation ensures that it is an excellent jurisdiction for the creation of many types of trusts. Indeed Bermuda has been an international forerunner in many areas including, among others, the creation of the purpose trusts, and the licensing and regulation of public trust companies.
While the use of a Bermuda trust may be available to an increasingly broad range of potential clients in many parts of the world, clients should always consult professional advisers in their home or other relevant jurisdictions before making a final decision to proceed.
This overview was last updated in January 2022. It is routinely reviewed by Appleby and updated when changes to the law require it. This Overview is for general guidance only and does not constitute definitive advice. Please contact one of our lawyers if you require more detailed information.