Globalisation and the Bermuda trust boom
Bermuda’s Society of Trust and Estate Practitioners’ annual conference takes place this week themed “Bermuda: a Centre of Excellence for the Family Office”.
With reputable international speakers attending, it is timely to consider the unique nature of trusts, their ongoing viability as succession planning vehicles and why Bermuda law trusts are being used more frequently internationally.
Trusts developed from the English common law and law of equity. A trust is a fiduciary relationship whereby a person (known as the “settlor” or “grantor”) transfers to a trustee, or declares itself as trustee of, certain property thereafter held by the trustee for the benefit of certain persons (known as “beneficiaries”) or purposes. The separation of legal and beneficial ownership of property allows flexibility for investment, and distribution of trust property over many years, including after the settlor’s death or loss of mental capacity.
Civil law jurisdictions, generally, do not have a trust law or enable formation of entities with the same succession planning utility. Two-thirds of the world’s jurisdictions apply civil law including, most of Europe, Russia, Latin America and China. Globalisation and the emergence of new economies have resulted in more people from civil law jurisdictions establishing trusts.
There has been a recent surge in trusts formed under Bermuda law, and changes of trusts’ governing law to Bermuda law, in order to utilise specific provisions of Bermuda’s trust law. Why?
The rule against perpetuities, and subsequent statutory incantations, limited the period that property could be held in trust. However, excluding trusts over Bermuda land, Bermuda law permits Bermuda law trusts established on or after August 1, 2009 to have an unlimited duration. Section 47 of Bermuda’s Trustee Act has been utilised by trustees to request the Bermuda Court to approve transactions including variation of beneficial interests in trust property, or to extend the duration of trusts established prior to August 1, 2009.
Section 47’s advantage over other jurisdictions’ trusts laws is, provided the Court considers the transaction expedient, consent of all adult beneficiaries is not required. Section 4 of Bermuda’s Perpetuities and Accumulations Act was amended recently, streamlining applications to extend the duration of trusts in circumstances where it is not otherwise possible. The Bermuda Court’s judgment this year in In the matter of the C Trust demonstrates the efficiency of the process.
Bermuda law facilitates the creation of non-charitable purpose trusts with or without beneficiaries. Non-charitable purpose trusts with beneficiaries are increasingly popular with entrepreneurial settlors, including those who do not yet have a spouse or children. Unlike most jurisdictions that permit such hybrid trusts, Bermuda does not impose requirements that the trustees be resident in the jurisdiction nor require the appointment of an “enforcer” to enforce the trustees’ performance of the purposes.
Many civil law jurisdictions impose forced heirship laws whereby most of the deceased’s estate passes under law to the deceased’s designated heirs in designated proportions. Forced heirship is contrary to common law principles of testamentary freedom. Some civil law jurisdictions also impose community of property systems whereby the property held by one spouse may be deemed to be owned jointly between spouses.
Many offshore jurisdictions have introduced “firewall legislation” in respect of trusts formed under the offshore jurisdictions’ laws whereby, with exceptions, the offshore jurisdictions’ courts are required to apply the trust’s governing law and not recognise foreign law forced heirship rights, community of property, matrimonial or other similar foreign law rights. Additionally, firewall legislation generally provides that courts in the jurisdiction are not permitted to enforce foreign judgments inconsistent with the firewall legislation.
The main exceptions to firewall legislation protection under Bermuda law are that Bermuda law does not determine capacity of a person to transfer land situated outside Bermuda or movable property transferred into a trust under a will made by a person not domiciled in Bermuda. The approach is similar in other jurisdictions. Firewall legislation is complex and many jurisdictions have amended their firewall legislation numerous times. Bermuda is finalising amendments to its firewall legislation to further simplify its structure, add clarity and extend its application.
Wealthy families with family members or property in politically or socially unstable jurisdictions may be concerned about the risk of kidnapping or confiscation of assets. The Bermuda Court is prepared to provide anonymity for trust beneficiaries, settlors and power-holders in Bermuda court proceedings.
Bermuda’s private trust companies (PTCs) may be managed by the settlor or persons nominated by the settlor, the settlor’s advisers or family members. Unlike other jurisdictions, Bermuda imposes no requirement for the PTC to engage a licensed administrator to administer the PTC or trusts of which the PTC acts as trustee, thereby facilitating privacy and flexibility.
Reputation, privacy and safety are priorities of international families. Bermuda’s flexible trust legislation, strong legal profession, discretion and efficiency in trust cases and stellar international reputation distinguishes the island. The frequency and quality of the international trust and financial conferences held in Bermuda, such as Transcontinental Trust, Legalweek and events like next year’s America’s Cup are all testament to that reputation.
Lawyer Ashley Fife is a Senior Associate with the Private Client and Trusts Practice Group at Appleby. A copy of Mr. Fife’s column can be obtained on the Appleby website at www.applebyglobal.com.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.