Memorandum On Bermuda Trusts

Bermuda trusts have for a number of years been an important feature in the international tax and estate planning fields, but the use of the Bermuda trust is not limited in its scope. This memorandum seeks to address a number of general questions and issues often raised in relation to the use and functions of a Bermuda trust.

1. What is a Trust?

A trust is not regarded in law as legal "person" such as an individual or company but is rather a set of obligations established under or imposed by law which binds the holder of property to hold the benefit of that property for other persons and not for the holder's own beneficial interest. The trust is a concept of the English common law system and had its origins in the English property law of mediaeval times .

2. How is a trust created?

A trust may be created by written instrument such as a will or trust deed or be imposed by operation of law. This memorandum deals only with the creation of a trust by written instrument other than a will.

The trust is created by an instrument in writing setting out the obligations of the trustee and indicating the property (the trust corpus or trust fund) which is being transferred to the trustee and the person for whose benefit the trustees are to hold such property (the beneficiary). The document usually also sets out the name of the person transferring the property (the settlor) , though provision is usually made in the trust deed for the trustee to be able to receive additional property either from the settlor or any other person to be held as an addition to the trust corpus and subject to the same trusts in favour of the beneficiaries.

3. What property may be put into trust?

Almost any property can be placed into trust, though professional trustees will usually be reluctant to accept trusts which involve the carrying on of an active business or holding undeveloped property or similar non-income producing assets, unless these assets are held by way of an underlying company whose shares are wholly owned by the trust. Cash or marketable securities or other income producing property are therefore the usual subject of a transfer into a Bermuda trust.

4. The parties to the Trust

The Settlor or Grantor - provides the assets which are to be subject to the trust. He must, however, transfer the assets and their control to the trustees and satisfy the general principle that there must be a complete disposition of the assets to the trustee. The settlor cannot retain absolute control over the assets to the exclusion of the trustee since to do so, may render the trust liable to be set aside as a sham. The settlor may of course reserve the right to revoke the trust and thus provide for the return of the assets.

The settlor of a discretionary trust will normally provide the trustees with a Letter of Wishes, indicating to the trustees how the settlor would wish the trustees to exercise the discretions given to them under the trust deed as to appointments to beneficiaries from the trust fund and other similar matters. This letter is expressed as an indication of wishes only and not intended to have any legal effect. A copy is normally provided to the protector if it is intended that the protector will have any role as to appointment to the class of beneficiaries and/or of distributions from the trust fund.

The Trustee - takes title to the assets transferred from the settlor and any other assets subsequently transferred with the consent of the trustees and is responsible for their investment and disposition in accordance with the terms of the trust deed. As to the appointment of corporate trustees of a Bermuda trust, only a trust corporation licensed under the Trust Companies Act 1991 or a private trust company set up to act as trustee of a specific named trust or group of trusts can be so appointed. Individuals appointed as trustees have no qualification requirements save in respect of purpose trusts (see later). The powers of the trustee are usually set out in the trust deed but the Trusts (Special Provisions) Act 1989 does include a schedule of the most common powers which can now be included by reference.

The Protector - will have such powers as are given to him by the trust deed and which powers often include the right to:
(a) Add or delete beneficiaries
(b) Alter the status of the trust and the governing law
(c) Appoint new trustees.
The Protector can be an individual, a committee or a corporation.

The Beneficiaries - usually a class of beneficiaries is named in the trust deed and the trustees are given discretion to appoint the whole or any part of the capital or income of the trust to any one or more of the beneficiaries. There is usually also a provision in the trust deed that on the expiration of the perpetuity period any remaining trust assets will be distributed equally among the surviving members of the class of beneficiaries and in default there is a general gift over to charity. So called "bearer trusts" where the named class of beneficiaries is made up exclusively of charities with the intent of having the "real beneficiaries" appointed later by the Protector under his power of adding to the class of beneficiaries are also known. These are commonly used where naming the intended real beneficiaries in the original trust deed is not desirable. However, in these cases, care must be taken to appoint the real beneficiaries as members of the class of beneficiaries before any application of trust assets for their benefit takes place.

The Trust Fund - the assets of the trust can be placed in a company, the shares of which are held by the trustees. Investments are then made in the name of the company, rather than the trustees.

5.a] Stamp Duty

At the present time settlements which are non-resident for Exchange Control purposes are not subject to any stamp duty either on the original trust corpus or any addition thereto. Settlements containing Bermuda assets (other than shares in a Bermuda exempted company or any foreign currency deposits in a Bermuda bank) are subject to stamp duty on the value of those assets.

5.b] Taxation

At the present time there are no income or capital taxes levied in Bermuda on non-resident trusts.

6. Investment of the Trust corpus

The Trustee Act 1975 provides for a range of government securities and bank deposits which are recognised as trustee investments. Because of the narrow range of authorised investments under the Act, it is usual for the trust deed to include a wide investment clause permitting the trustees to have virtually the whole investment powers that an individual might have. This wide power does not however exclude the trustees obligations to select investments which are suitable for the trust and its objectives.

7. Who may settle a Trust?

Any person of full age and not under a legal disability may settle a trust. Residents of civil law countries who validly settle a Bermuda trust will not find the trust set aside by the Bermuda Courts pursuant to the laws of their residence in respect of succession rights or marriage rights arising under the laws of that jurisdiction unless Bermuda has corresponding laws or public policy rules.
Any settlement made in order to defraud existing creditors will be liable to be set aside at the instance of any such creditor. Where a settlement is made by a person who at the time of making the transfer into trust had no existing creditors (whether actual or contingent) and no such creditors emerge within a period of two years from the date of the settlement then the settlement will not usually be set aside. Any creditor seeking to set the settlement aside must show that the creditor was at the time of the transfer to the settlement reasonably foreseeable by the settlor as a person to whom a obligation might become owed and that the transfer of property was made with the "requisite intention" (as defined in the Conveyancing Amendment Act 1994) and at an undervalue. The onus of proof is on the creditor seeking to set aside the settlement.

8. For how long can a Trust be established?

Under the Perpetuities and Accumulations Act 1989 a trust can be established for a specified period of up to 100 years. It is also possible to adopt the old rules permitting a perpetuity period of a life or lives in being plus 21 years (the so called King George clause - as frequently the life or lives in being selected are the descendants of King George V living at the date of the settlement).

9. Can the Trust deed be changed?

If the trust is expressed to be revocable by either the settlor or the trustees the terms of the trust can be changed by revoking the trust and resettling the trust corpus on the terms of a new trust deed incorporating the required changes.

If the trust is expressed to be irrevocable it may be possible (if all adult beneficiaries agree) to make application to the Bermuda Courts for approval of any variation of the provisions of the settlement. However, as the usual form of settlement is discretionary this may be unnecessary as there is usually sufficient flexibility in the provisions of the settlement itself .

It is usual to include in the settlement a power to move the trust to another jurisdiction (the so called "flee clause"). The power is usually given to the Protector or the Trustees in the event of a declaration of war or other similar emergency to move the situs and/or the administration of the trust to another jurisdiction and to apply the laws of that jurisdiction henceforth as the governing or administrative law of the settlement. Power is usually given under the settlement at that time to make any necessary amendments to the provisions of the settlement to conform the settlement to the laws of the new jurisdiction.

10. What other types of Trust can be created under Bermuda law?

In addition to the settlement giving either fixed interests or discretionary interests to beneficiaries, it is also possible to set up charitable and purpose trusts in Bermuda.
The charitable trust will be devoted to charitable purposes and will usually provide that the trust corpus is held on trust for a particular charity or charities or for a specific charitable purpose. Charitable for this purpose under an old statute of Elizabeth I is defined as being for the relief of poverty, the advancement of education or religion or other purposes similarly beneficial to the public at large.

Purpose trusts are a creation of the Trusts (Special Provisions) Act 1989 and are trusts which are established for a purpose or purposes which are specific, reasonable and possible and are not under the law immoral or contrary to public policy or unlawful. A trust for a purpose under the Act means a trust "other than a trust that is for the benefit of particular person whether or not immediately ascertainable or some aggregate of persons ascertained by reference to some personal relationship."

The statutory period for the duration of the purpose trust cannot exceed one hundred years. The purpose trust must have at least one trustee who is a qualified person under the Act, and an enforcer capable of enforcing the trusts must also be appointed.

[For a more in depth review of the Purpose Trust legislation and its uses we would be happy to supply a copy of our Memorandum on Purpose Trusts]

11. What use can a Bermuda Trust be to me?

The uses to which a trust can be put are, of course, as numerous as the ingenuity of trust lawyers can devise. However, it may be useful to summarise some of the principal uses for which trusts have been formed:
1. For estate planning:-
(a) As a substitute for a will such as a revocable trust or trusts to own shares of a family company.
(b) To defeat forced heirship provisions of law in the settlor's domicile.
(c) To overcome difficulties caused by community of property regimes.
(d) To provide certainty of jurisdiction where difficult questions of domicile might otherwise result.
(e) Secrecy, particularly in countries where the family does not want its wealth known to avoid kidnapping and similar crimes of extortion.
2. Business trusts:-
(a) "Rabbi" pension plan trusts and other deferred compensation schemes.
(b) Unit trusts for collective investments.
(c) ESOP and other similar employee stock option plan trusts.
3. To protect assets from creditors and others:-
(a) Asset protection trusts.
(b) Spendthrift trusts.
(c) Pre-marital trusts
4. To avoid confiscation of assets by a hostile regime.
5. To avoid the future imposition of exchange control or other regulations restricting the movement of capital.
6. To provide a central enduring control of assets for geographically widely scattered beneficiaries and investments.
7. Taxation:-
(a) transfer of assets abroad to avoid inheritance or capital gains taxes;
(b) pre-immigration trusts;
(c) purpose trusts.
These are just a few of the uses to which trusts are commonly put but the list is by no means intended to be exhaustive.

12. Why Bermuda as the jurisdiction for my Trust?

Geographical accessibility - Bermuda's mid-Atlantic location provides easy access by air to and from most major cities in North America and Europe, as well as offering the services of a first-class tourist destination.

Political stability - Bermuda is a self-governing colony with an elected legislature and is the oldest British colony, having been founded in 1609. The Bermuda Government has been cognizant of the need to maintain Bermuda's place in the forefront of international business and is sensitive to the needs of that market and of investor protection without introducing onerous regulations. Bermuda's GNP per capital is one of the highest in the world, thus allowing a substantial degree of economic stability with little or no unemployment or substantial Government debt.

Sophisticated infrastructure - Bermuda has been a leading international business centre for a number of years and has a sophisticated and well-educated workforce. Bermuda trustees and lawyers are accustomed to working with clients, lawyers, accountants and professional advisers located throughout the world.

Communications - Bermuda enjoys excellent telephone and other electronic communication with the rest of the world being connected to the transatlantic fibre-optic cable, as well as having satellite back-up facilities.

13. How do I set up a Bermuda Trust?

Landmark Trust (Bermuda) Limited will be pleased to advise and assist in the setting up of all types of Bermuda trusts. Please call us on Tel: (441) 292 4131 Fax: (441) 296 8080 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it. "> This e-mail address is being protected from spambots. You need JavaScript enabled to view it.