Tickled Pink: Rediscovering Trusts in Bermuda

In international finance circles ‘Bermuda’ has become synonymous with ‘Insurance’. Although Bermuda has been providing international trust services since the early 1900’s, Bermuda’s private client industry has become lost in the shadow cast by the dominate insurance, reinsurance, captive and ILS sectors.

In recent years we are finding that families and advisors are tickled pink to rediscover what Bermuda’s private client and trust industry has to offer.

“Sooner or later everything old is new again”[1] – A return to traditional succession planning

In 1980s and 1990s there was an obsession with using international trust structures primarily as a vehicle to legally minimize taxes. Many less sophisticated advisors treated trusts like holding companies, ignoring the trust’s traditional role in managing the succession of assets. In 2001 the OECD published, “Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes”[2], and since then the IFCs have faced a continuing stream of challenges resulting in the current environment of tax ‘morality’ and initiatives such as FATCA, CRS and public registers of UBOs.

This has prompted changes to legacy structures as they adapt to a changing environment (see tools below). Bermuda has also seen a resurgence in traditional succession planning. This is particularly evident with current generation of entrepreneurs (especially those in Asia, Russia and Latin America) who are wrestling with the challenges of succession planning and philanthropy.

Families with inherited wealth are encountering even more impediments to preserving wealth for future generations, while at the same time avoiding the damaging effects that great wealth can have on the reluctant heirs.

Families and their advisors are rediscovering that Bermuda offers both traditional and innovative tools, together with decades of expertise to address these challenges. These include:

Private Trustee Companies (PTCs)

Bermuda was a pioneer in the use of PTCs. It continues to be a jurisdiction of choice for formation and administration of PTCs, offering an elegant flexible cost effective regime. Unlike a number of other jurisdictions, corporate directors are permitted, directors and secretaries need not be resident in Bermuda and participation by a licensed administrator is not required – which makes the Bermuda PTC an ideal companion for Family Offices, even if not resident in Bermuda.

Reserved Powers

While Bermuda’s trust legislation has always permitted settlor reserved powers, the Trusts (Special Provisions) Amendment Act 2014 clarified the position, as well as adding some unique provisions such as clarifying that the power holder is not a trustee, providing that such powers are generally by default personal and non-fiduciary, and in certain instances allowing the trust instrument to restrict the trustee’s duties to the power holder and to no other person. [3] These provisions are particularly attractive to entrepreneurs and families that find the surrender of complete control over trust assets for succession planning purposes unfamiliar and unappealing.

Firewall

The volume of trust litigation has exploded in recent years, fueled by an aggressive English Family Court, a new generation of litigious beneficiaries and poor investment returns. The importance of strong firewall legislation cannot be over emphasized. Bermuda’s firewall legislation originally introduced in 1989 and amended in 2004 continues to attract trusts to Bermuda. The Bermuda Trust Law Reform Committee will be updating the provisions further in 2016. A number of families and their advisors have taken comfort that the Bermuda courts have demonstrated a willingness to stand up to the English Family Court[4]

Dynastic Trusts

Families that have accumulated significant wealth appreciate that, if properly managed, their legacy should provide a stable foundation upon which future generations can build and prosper. A properly designed and administered Dynastic Trust is an ideal vehicle. Naturally a Dynastic Trust must be free from perpetuity periods. The Bermuda Perpetuities and Accumulations Act 2009 abolished the rule against perpetuities and excessive accumulations for trusts formed after 1 August 2009. In 2015 the legislation was further amended to enable trustees of pre-2009 Bermuda law trusts (including those originally established in other jurisdictions) to make a simplified, cost effective application to the Bermuda Courts to extend or abolish the perpetuity period. Many new and existing structures have come to Bermuda to take advantage of these provisions.

Experience

Bermuda has experienced internationally renowned licensed trust and corporate service providers[5]

“The best-laid schemes o' mice an' men”[6]

It is impossible to plan for all contingencies. From time to time a Trustee will find that the trust instrument does not adequately provide for unforeseen circumstances such as marriage breakdown, family disputes, change in financial circumstances, change in residence or domicile, change in tax or other laws. They might also find they need to deal with trust property in a manner that deviates from the strict provisions of the trust deed.

Bermuda, like many other jurisdictions, has a legislative extension of the rule in Saunders v Vautier where the court can consent to a variation of the trust on behalf of beneficiaries who are unable to consent for themselves[7]. The use of this section becomes problematic where obtaining consent of all beneficiaries is difficult or impossible, for example where consent by a beneficiary to the variation will trigger adverse personal tax consequences.

Section 47 of Bermuda’s Trustee Act 1975 is a unique and extremely powerful provision that allows a trustee to apply to the court for additional powers, including the power to effectively vary any provisions of the trust[8] if it is ‘expedient’[9], avoiding the necessity of obtaining consent from all beneficiaries. The Bermuda courts have found that a variation for the purpose of avoiding or reducing taxes is expedient. They have also found that the section can be used give the trustees the power to vary beneficial interests, in addition to those related to management and administration.

A significant number of trust have migrated to Bermuda to utilise this provision.

“To err is human”[10] - Statutory Hastings-Bass

Private client practitioners will be familiar with the Rule in Re Hastings-Bass (the “Rule”). It was a popular tool used to set aside decisions of trustees and other fiduciaries, most notably where the decision resulted in unexpected taxes. So while the revenue authorities might nor forgive, the courts effectively would, until Pitt v Holt and Futter v Futter which substantially changed and limited the application of the Rule.

Recognising the value of the Rule, Bermuda’s section 47A of the Trustee Act 1975 gives the Bermuda courts a statutory power to set aside the flawed exercise of fiduciary powers which is broadly the same as existed at common law prior to Pitt v Holt and Futter v Futter. The Bermuda law has some interesting distinguishing features from other similar legislation - including the application of the jurisdiction to the flawed exercise of all fiduciary powers, regardless of whether they are operated in the context of a trust or in respect of trust property.

In the recent decision of In the Matter of the F Trust and In the Matter of the A Settlement[11], the Chief Justice of Bermuda granted both applications under section 47A and held that the failure to take into consideration a relevant consideration (the UK tax consequences) were “financial significant and legal considerations”, and that the section provided the court with an unfettered statutory discretion.

"For of those to whom much is given, much is required"[12] – Bermuda Philanthropy

Many wealth families and entrepreneurs wish to engage in philanthropic activities without the constraints imposed by traditional onshore charitable vehicles. Recent example is Mark Zuckerberg, founder and CEO of Facebook. On 1 December 2015, announced that he is planning to give away during his lifetime 99 per cent of his Facebook’s shares (worth US$45 billion) to charity with the long-term objective of advancing human potential and promoting equality for future generations[13]. “By using an LLC instead of a traditional foundation [501(c)(3) tax exempt organization], we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively,” Zuckerberg wrote. 

For many years philanthropists have enjoyed the same advantages in Bermuda with a privately funded Bermuda charitable/philanthropic trusts where the trustee is a licensed trust company or a private trust company[14]. In particular Bermuda trusts can be designed so they are not subject to restrictions on investments (for example angel investments in clean energy startups), there are no distribution quotas, funds can be used for lobbying and political ads, and anonymous giving and operation are possible[15]. Bermuda trusts potentially offer a number of other advantages such as the protection of Bermuda’s firewall legislation, and access to a wider range of investments from a tax neutral platform.

Bermuda is experiencing significant growth in philanthropic structures, either as part of a family’s succession structure or as standalone entities.

Concluding words

Come rediscover Bermuda, you will be tickled pink.

[1] King, Stephen, The Colorado Kid, page 45

[2] OECD, November 2001

[3] Trusts (Special Provisions) Act 1989, sections 2(3) and 2A

[4] Charman v Charman [2006] EWHC 1879 (Fam) at 54.

[5] Bermuda Trust Companies were named STEP’s 2015/16 Trust Company and Independent Trust Companies of the Year

[6] Burns, Robert, To a Mouse, on Turning Her Up in Her Nest with the Plough, 1785

[7] Section 48, Trustee Act 1975

[8] RE ABC Trusts [2012] Bda LR 89

[9] GHIJ v KL [2010] Bda LR 86 at para 9

[10] Alexander Pope, An Essay on Criticism

[11] [2015] SC (Bda) 77 Civ (13 November 2015)

[12]President-elect JOHN F. KENNEDY, address to the Massachusetts legislature, January 9, 1961.—Congressional Record, January 10, 1961, vol. 107, Appendix, p. A169.

[13] https://en.wikipedia.org/wiki/Chan_Zuckerberg_Initiative

[14] Charities Act 2014 exempts privately funded trusts that do not solicit funds from the Bermuda public or the Bermuda Government if the trust has a licensed trustee or private trust company as trustee

[15] Matthew Yglesias, http://www.vox.com/2015/12/2/9836884/zuckerberg-llc

Randall Krebs
Director