Bermuda Purpose Trusts

Charitable trusts have been a feature of Bermuda law for many years but the definition of "charitable" was somewhat restrictive requiring a public purpose with the result that many quasi-charitable or philanthropic trusts failed to meet that test and were thus void.

To enable trusts to be established for philanthropic or other purposes which might not meet the charitable test, the Bermuda Legislature included in the Trusts (Special Provisions) Act of 1989 the power to establish a purpose trust being a trust established for a specific purpose or purposes as distinct from a trust established for the benefit of a specified class of beneficiaries. This Act was amended by the Trusts (Special Provisions) Amendment Act of 1998, updating the original legislation and making it a little more user friendly.

The Act allows that a trust may be created for a charitable or non-charitable purpose or purposes provided that the following conditions are met;
1) the purpose or purposes must be sufficiently specific to allow the trust to be carried out,
2) the purpose must not be unlawful or contrary to public policy,
3) the trust must be created in writing.


As a result, the purpose trust does not have beneficiaries for whom the assets of the purpose trust are held but merely has a purpose or purposes for which those assets are to be applied. However, as the prohibition against human beneficiaries which was contained in the original Act has been repealed by the Amendment Act, it would now be possible for the Trust Deed to provide for human beneficiaries to be residuary beneficiaries upon the ending of the purpose for which the trust was created. Should the Trust Deed not have these provisions then an application can be made to the Court to add named beneficiaries.

Since the purpose trust has no beneficiaries to enforce the trust, it is usual to provide for the appointment of an enforcer, which is similar in concept to the position of the protector of a "regular" trust. The enforcer will have the power to appoint new trustees and ensure that they act in accordance with the trust deed. The enforcer should be named in the trust deed and should make provision for the appointment of a successor. Frequently the enforcer will be the client’s lawyer in Bermuda, although this is not mandatory.

The perpetuity period for the trust can be up to 100 years or such shorter period as defined in the trust deed. During the life of the trust, both income and capital may be distributed by the trustee in any way so long as it is in keeping with the purpose of the trust. Upon the termination of the trust, the assets remaining in the trust at that date will be distributed in accordance with the terms of the trust deed.


Practical uses of purpose trusts

Whilst the original aim of the Act was to allow for the creation of quasi-charitable or philanthropic trusts, the purpose trust is now used for a wide variety of financial purposes. The purpose trust has been used for holding shares of voting stock in companies (including private trust companies) where it is desired that no one person or group controls that company and in corporate financing for large capital assets where the trust is used to own the shares of the Bermuda company involved in the transaction. The trust can also be used to hold the shares of a Foreign Sales Corporation or other type of offshore corporation for a U.S. resident. Other uses include the incorporation of a purpose trust in financing transactions to add an additional layer of protection in the event of insolvency of the borrower, holding voting stock to avoid controlled foreign corporation designation and the protection of group assets in areas such as marine pollution and environmental protection regulations. This structure has no beneficial owner, no beneficiaries and (if the trust is declared rather than settled) no settlor. This allows for an efficient and anonymous method of ownership. The trust is also often used to hold the shares of a Bermuda company investing into a foreign jurisdiction, and in the leasing or financing of aircraft, ships etc. where the trust is used to hold the asset until the lease, finance or escrow contract has been fulfilled. Joint ventures have also made use of the purpose trust as a vehicle to hold the shares of a corporation in order to ensure that both parties are equally represented.

Removing funds from a purpose trust is relatively straightforward. It is only possible to pay funds out of the trust so long as the payments meet the stated purpose of the trust. It is therefore usual for the purpose of the trust to be expressed as that of owning the shares of an offshore corporation. So long as the corporation remains solvent, then the trustees are complying with the purpose of the trust by holding its stock. When the usefulness of this structure has expired, any remaining assets are removed from the company and it is wound up. With the company expired there is no further use for the trust and it is terminated.