Bermuda has been in the business of trusts for the past 50 years and has developed a formidable reputation as being one of the premier offshore jurisdictions in which to develop trust structures. Bermuda's practitioners have considerable experience in the field of trusts and are familiar with trust matters with people from all over the world, particularly with individuals whose legal systems do not derive from the English common law.
Bermuda has been at the forefront in the creation of the purpose trust, which was first introduced by the Trusts (Special Provisions) Act 1989. This statute was amended by the Trusts (Special Provisions) Amendment Act 1998 and has led to expanded opportunities for the use of purpose trusts. Purpose trusts are discussed later in this Guide.
Bermuda's principal statute governing trusts and their administration is the Trustee Act 1975. This statute is largely patterned on the English Trustee Act 1925. In a continued response to the need to reform Bermuda's trust law the Trustee Amendment Act 1999 was introduced to modernise a number of important trust administration provisions such as the field of trustee investments.
The Trusts (Regulation of Trust Business) Act 2001 introduced an extensive system of trust licensing regulated by the Bermuda Monetary Authority which has tightened up the requirements for trustees to be licensed and, in particular, requires that all public trust companies possess an unlimited trust licence.
The Bermuda Monetary Authority vets and continually monitors licensed trustees to ensure, among other things, 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.
Following the enactment of the Trusts (Regulation of Trust Business) Act 2001 the opportunities for an individual to serve as trustee are limited. It is a criminal offence to provide services as a trustee in Bermuda as a business, trade, profession or vocation without a licence, unless specifically exempted under the Act. One such exemption applies where a co-trustee is licensed. Unlike trust companies, individuals may only apply for a limited trust licence.
More recently, the Perpetuities and Accumulations Act 2009 which came into operation on 1 August 2009 has abolished the rule against perpertuities for all trusts formed on or after 1 August 2009. This Act now permits the formation of dynastic or perpetual trusts and has modernized the laws of Bermuda relating to the application of the rule against perpetuities to trusts which will be discussed later in this Guide.
2. WHAT IS A TRUST?
A trust is a legal relationship and not a separate legal entity. The relationship is created by the person wishing to create the trust ("the settlor" or "the grantor") and the trustees (the persons willing to undertake the office of trustee). As part of this relationship property ("the trust fund") is declared to be held by the trustees for the benefit of certain parties ("the beneficiaries") or for certain purposes.
A trust has the following characteristics:
a. The assets constitute a separate fund and are not a part of the trustee's own estate.
b. Title to the trust fund stands in the name of the trustee or in the name of another person on behalf of the trustee.
c. The trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.
The following diagram illustrates the relationships:
3. 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.
4. WHO CAN SERVE AS TRUSTEE?
There is no requirement that the trustees 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, such as to ensure that the provisions of the Bermuda legislation would be 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 bank or other professional personnel. Ordinarily, care should be taken to avoid appointing as a trustee someone who is a beneficiary of the trust, even where the trust document itself does not expressly prohibit this appointment. Care must be taken not to contravene the trust licensing rules (see introduction).
b. 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. At present, Bermuda has some 32 licensed trust companies, ranging from trust companies owned by law firms and accounting firms to large public trust companies owned by banks. Public trust companies are licensed and regulated under The Trusts (Regulation of Trust Business) Act 2001. The Bermuda Monetary Authority is the appointed regulatory body under that Act and must comply with the general policy directions issued by the Ministry of Finance.
c. 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 licensing regime of the Trusts (Regulation of Trust Business) Act 2001. However, some companies may require licences and advice should be taken in each case on the question of whether a licence is required. Private trust companies may include "trust" or "trustee" or some variant in their names so long as the word "private" or the abbreviation "(Pvt.)" is also included.
5. WHAT IS THE TRUST FUND?
It is common to establish a trust with a nominal cash sum. This, together with the property subsequently contributed (and property from time to time held by the trustees under the terms of the trust deed), is generally referred to as the "trust fund" (and sometimes, by definition, as the "trust property", the "trust assets" or some other variant). The trust fund may consist of any type of property. For example, cash, land, securities and interests in property, including interests under other trusts.
It is quite usual for trust assets to be held through the medium of a company wholly owned by the trustees. This may, in any event, be desirable or necessary - for instance, so as to confer on the trustees the benefits of limited liability or because the laws of the jurisdiction where the asset is situated requires ownership by a person or corporation resident in that jurisdiction. Where such a company is employed in this way, the trustees will wish to ensure that its issued shares are fully paid-up and not subject to a contingent liability. In addition, professional trustees will require a regular flow of information regarding a company in which they have a controlling interest.
6. WHO CAN BENEFIT?
Any legal person (i.e. either individuals or corporations) can be a beneficiary. Charitable trusts have charitable objects and special purpose trusts are created for purposes or non-charitable objectives.
7. HOW LONG CAN A TRUST LAST?
The Perpetuities and Accumulations Act 2009, states that the rules against perpetuities and excessive accumulations will 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.
8. WHAT NEEDS TO BE CONSIDERED WHEN PREPARING A TRUST DEED?
Before setting up a trust, it is advisable to first consult with a lawyer who specialises in the area of trusts. The trust is established by deed or document under seal. The settlor (or grantor) and his advisers will need to consider the following matters for the purposes of drafting the trust deed:
- Trust Deed – A trust can be established by a deed of settlement signed by the settlor (or grantor) and the trustees; or alternatively, by a deed called a declaration of trust signed by the trustees alone.
- Trust Fund – What assets are intended to be transferred to the trustees to form the trust fund? This will have an influence on the type of trust deed that is prepared.
- Beneficiaries – Who will benefit from the trust? The beneficiaries can be named specifically in the deed or may be referred to by class in a schedule to the deed.
- Trustees – It will be necessary to consider whether individuals or a public or private trust company will be appointed as trustee of the trust and to set out their full names and addresses where possible in the deed. Where professional trustees are selected, the trustees' compliance standards and fees will need to be discussed with them, as well as any special administrative powers that need to be included in the trust deed.
- Trustees' Powers – It is usual to confer wide investment powers on trustees and include the power not to diversify the trust fund if holding securities in a single entity or investment is important. The trust deed will also contain a broad range of administrative powers designed to facilitate the trustees' administration. These powers must be examined carefully and agreed before the trust deed can be finalised. Such powers can include the power to add or remove beneficiaries (which could be vested in some other person such as the protector). This may be an important point to be discussed especially when maximum flexibility is desired.
- Removal of Trustees – Terms will be included in the trust deed providing for the removal of trustees and the appointment of new trustees. This power will often be vested in named or described persons successively and may rest with the protector or, if none, with the settlor or grantor.
- Protector – If a protector is to be appointed, the first protector will usually be named in the deed and provisions for the removal and appointment of successor protectors will be set out in the trust deed. The appointment of a protector can facilitate checks and balances, particularly where the settlor or grantor needs to be removed from the trust. Careful consideration needs to be given to what powers can and should be given to the protector. (See further discussion later in this Guide).
- Revocable/Irrevocable – The trust deed may be expressed to be irrevocable or a provision may be included conferring a power of revocation or amendment on some person (usually the settlor or grantor). Tax considerations in the relevant foreign jurisdiction generally dictate whether or not a trust should be created so as to be revocable or irrevocable.
- Fixed/Discretionary – Will the interests under the trust be fixed, or will the trustees be allowed to use their discretion when distributing the trust fund? In the case of a discretionary trust, the trust deed will confer wide powers on the trustees enabling them, at their discretion, to appoint or pay or apply income or capital to or for the benefit of any one or more of the beneficiaries. (The benefits of a discretionary trust are discussed later in this Guide.)
- Letter of Wishes/Client Attorney Privileged Memorandum – Where a discretionary trust is established, the settlor or grantor will usually want to express his or her wishes with respect to the administration of the trusts and distribution of the trust fund to the beneficiaries. This is usually expressed by way of a letter of wishes or client/attorney privileged memorandum so that the trustees are aware of the settlor's or grantor's intentions. (This will be discussed in the next section.)
- Jurisdiction – What law will govern the trust? Which courts will hear disputes that arise concerning trust matters? This is another decision the settlor or grantor will have to make when establishing the trust. In general, a trust governed by Bermuda law will ordinarily have one or more trustees resident in Bermuda and these trustees will be subject to the jurisdiction of the Supreme Court of Bermuda. The person having power to change the governing law of the trust and the terms dictating a change of the governing law will be specified in the trust deed.
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