Located just a two hour flight from New York and a seven hour flight from London, Bermuda has been at the forefront of the trusts, insurance and funds industries 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 both private client and commercial trusts for international clients.
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 (settlor or grantor) and the trustees (the persons willing to undertake the office of trustee). As part of this relationship 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 name of the trustee or in the name of another person on behalf of the trustee.
- The trustee has the power and the duty, in respect of which it is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon it by law.
3. WHAT IS A PURPOSE TRUST?
A purpose trust is a trust created to fulfil purposes rather than to hold property for beneficiaries. The concept was introduced in the Trusts (Special Provisions) Act 1989 and was conceived, 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.
The introduction of the Trusts (Special Provisions) Amendment Act 1998 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.
- The trust must be lawful and it must not be contrary to public policy.
Under Bermuda law, a purpose trust may last indefinitely or for a specified term of years.
In Bermuda hybrid trusts, with both purposes and beneficiaries, are permitted.
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 Trusts (Special Provisions) Act provides the settlor, a trustee, or any person with a sufficient interest in the trust, the power to make 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.
4. WHY USE A PURPOSE TRUST?
Purpose trusts have the following advantages:
- Flexible vehicle - there is a lack of rigid requirements for the creation and operation of trusts when compared to companies.
- A trustee need not be concerned with duties owed to beneficiaries with competing claims and interests.
- The terms of the trust, its settlor and the purposes are confidential.
- Trusts are not required to be registered except for certain trusts which are themselves established to fulfil a specific statutory obligation, for example trusts established to provide pension benefits to persons with Bermudian status and their spouses under the National Pension Scheme (Occupational Pensions) Act 1998.
- Trusts are relatively easy to set-up, requiring fewer formalities than the incorporation of a company.
- Assets are dedicated to a specific purpose and are "ring-fenced" from insolvency risks, thereby creating a protected fund so that "bankruptcy remoteness" can be achieved.
- The transaction may be effected "off balance sheet" or as an "orphan" structure in relation to its originator.
- Purpose trusts can facilitate arrangements to separate voting from economic control.
- Purpose trusts can provide an ownership vehicle for private trust companies (PTCs), special purpose vehicles (SPVs) and special purpose insurers (SPIs).
- Purpose trusts can be used to hold a fund as security for parties' obligations in commercial transactions.
Purpose trusts have also been used for philanthropic purposes including for research and development. In Bermuda, even prior to the introduction of purpose trust legislation, a trust established for charitable purposes was valid even if it did not have beneficiaries. However, many clients wish to establish trusts for philanthropic purposes which may not fall within the definition of "charitable". Bermuda's purpose trust legislation provides that trusts formed for philanthropic or other purposes are valid provided, as required for all purpose trusts, the purposes are sufficiently certain to be carried out, lawful and not contrary to public policy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.