US President Bill Clinton signs new measures into law next week that local service providers say could affect the Island's trust business.

The industry will be impacted by Monday's removal of a US provision that has protected American beneficiaries of non-US trusts from taxation.

US tax specialist at Ernst & Young Bermuda/Kempe & Whittle, Patrick Hackenberg said, "I think that it will have a substantial impact on the Bermuda market.

It will affect any trust in Bermuda that has a US beneficiary or a US grantor or settlor.'' It almost certainly will mean more in legal fees, and possibly other charges, for those whose trusts are affected.

One opinion is that local business from what the US call "foreign'' trusts that are routing benefits to US citizens from outside the country, could eventually dry up, as grantors seek other structures.

Another example affected by the changes involves US families seeking to diversify their assets outside of the US.

For non-US trusts, the principal change is that assets paid to US beneficiaries, which have been treated up to now as non-taxable gifts from a foreign grantor, will incur tax liabilities for the beneficiaries.

Current distributions of income will retain their character and be taxable at the applicable capital gains rate. But distributions of accumulated income, including capital gains, will lose their character, and in addition will incur an interest charge to compensate for the benefit of tax deferral.

It could have an impact on families in Bermuda, who would create a trust in order to shield their assets from the impact of Bermuda stamp duty. Many local families have an American connection.

Trusts of Bermuda property are still subject to US tax if they are passed on to, for example someone with dual (Bermuda and US) status.

The package of changes was more comprehensively proposed in February 1995, but was subsequently divided into two bills, one dealing with the foreign grantor trust rules and another that will eventually deal with rules on expatriation.

Appleby, Spurling & Kempe trust partner, Monica Jones said: "US taxes extend outside of the realm of the United States. And if a Bermudian creates a family trust for the benefit of themselves and their spouse, who may have dual citizenship, and their children who may also have dual citizenship, then the spouse and children may be taxable in the US, because of these new provisions, and, as US citizens, they may also be required to submit additional reporting.

They would be taxable on, and have to report on, Bermuda property.

Conyers, Dill & Pearman partner and head of the trust department, Alec Anderson, agrees that "it will potentially hurt the in-bound trust involving a non-US settlor.'' But he said it shouldn't really affect in any major way other trust business.

Mr. Anderson said, "This legislation doesn't help, but it doesn't drastically hurt. I don't see this as a drastic prohibition against business out of the US.

"The point here is that if a US person is setting up a trust in Bermuda, there is no tax benefit to them now. The only adverse thing for them in the new provision is that they will have to do more reporting, which means more costs.

"For non-US settlors, their trusts will be affected somewhat, but they can still be done in a tax effective way. But it does affect those structures adversely in that the US citizen beneficiary may now have to report the existence of the trust and any distributions they receive.

"It's not helpful, but it shouldn't really hurt you in terms of actual tax.

What it hurts is your confidentiality. It will be perceived to be a problem by some, and for others it won't be a big deal, depending on who the client is.

"Also they have restricted, in cases of a foreign settlor, on how you can set it up.'' Said Mrs. Jones, "We could see not so much less business from US sources, but a different form of business. It will definitely change things in the trust world and make planning for multi-national families more complex and expensive.

"We have been aware of it since February 1995 and so it has already had an impact on the planning that is done for families who have an American connection.

"In the short term it is meaning the restructuring of existing trusts, which will make it very busy for us. In the long term, it will mean that that source of business could dry up.''