New legislation is expected to stimulate the trust industry in Bermuda by attracting international clients who wish to retain a certain level of control over their trusts without the uncertainty of the trust being deemed invalid.

Trusts have long been used as an important tool for prudent tax and estate planning, ensuring the orderly succession and transfer of wealth to one's heirs on death.

A properly designed trust can also ensure the continuity of running a family business, protect assets from aggressive creditors and in some countries can help minimise the impact of political risk and forced heirship rules.

For individuals from perceived high risk jurisdictions due to political uncertainty and kidnap and ransom incidents, the protection and confidentiality of a trust structure can be enormously attractive.

A well-structured trust - where a person (the settlor or grantor) transfers legal ownership to trustees of his choosing to hold in trust for the benefit of ascertained beneficiaries - can provide protection and comfort in more ways than one.

But many settlors find the idea of transferring their hard earned assets and relinquishing total control of their property unpalatable. This is often particularly the case if the trust concept is unfamiliar to them or if the trustee is located in a foreign country.

Fortunately, many offshore jurisdictions have responded with legislation allowing for reserved powers trusts, where a settlor (or someone of his choosing) may retain fairly extensive rights and powers over the trust.

Bermuda introduced legislation allowing for reserved powers trusts in 1989 and this approach has since become a growing trend and a marketable feature in other jurisdictions.

These legislative enactments largely confirm the position under the common law but add clarity and comfort to individuals previously reluctant to entertain the proposition of a trust structure for fear that they would lose control over their assets.

This month, Bermuda's reserved powers trust legislation has been enhanced with the passing of the Trusts (Special Provisions) Amendment Act 2014 (the Act).

Whereas the 1989 legislation included a general provision allowing settlors to reserve a wide variety of powers over a trust, the new law adds certainty by including specific provisions that enable settlors to reserve or grant an extensive range of powers listed in the Act while retaining the legal validity of the trust.

Some of the powers that can now be granted or reserved by settlors include the power to: change the terms of the trust instrument; give directions on the appointment, payment, application, distribution or transfer of the trust property; control appointments and decisions with respect to trust owned companies; give directions in connection with investments; change any trustee, protector, enforcer, or office holder; add and exclude beneficiaries; change the governing law of the trust; and make trustee actions subject to third party consents.

It is now clear that the settlor can reserve the right to revoke a trust (so that the assets revert to the settlor or as he or she directs) without the risk of the trust assets forming a part of the settlor's estate for probate purposes in the event that the power to revoke has not been exercised before the settlor's death.

Further benefits of the new law are also conferred on trustees who will be protected from liability for breach of trust or other fiduciary or equitable duty in the event that they act, or refrain from acting, in compliance with or as a result of a valid exercise of any of the powers listed in the Act.

The introduction of the new legislation should therefore come as welcome news to settlors and trustees alike.

The new law also provides that the grant or reservation of the powers listed in the Act do not make the power holder a trustee unless they are formally appointed as such.

The legislation includes statutory default provisions addressing the fiduciary or non-fiduciary nature of certain powers where the trust instrument is silent. In the absence of any contrary provision in a trust instrument created after the commencement date of the Act, all such powers granted (or reserved) are presumed to be personal and non-fiduciary in nature, unless the power holder is the sole trustee.

Another unique feature of the Act is that where a power holder who is not the sole trustee has a general power of appointment, revocation or has a present beneficial interest in all or part of the trust property, the trust instrument may provide that the trustee only owes duties to that power holder and to no other person.

This provision will undoubtedly have interesting and useful implications where it may be desirable to restrict the disclosure of certain sensitive information to people to whom the trustee owes no duties.

As with any area of the law, it is always advisable to seek advice from a competent professional who is qualified in the field.

Article first published in The Royal Gazette, July 2014

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