Bermuda: Super-Powered Settlors

The reservation or grant of certain powers by settlors has always been possible under Bermuda’s trust law but, historically, there was some uncertainty about exactly how far settlors could go without calling the validity of the trust structure into question. The recently passed Trusts (Special Provisions) Amendment Act 2014 (TAA 2014) now provides statutory clarity and certainty in this area.

The TAA 2014 expressly lists certain interests and powers that can be retained by a settlor or granted to a third party (e.g. a protector or beneficiary) without thereby prejudicing the validity of a trust. It also clarifies that the retention or grant of these powers,1 and interests,2 will not cause the property in the trust to become part of the settlor’s estate. Introducing certainty in this area distinguishes Bermuda from some of the other major o. shore jurisdictions.

The concern for lawyers who previously sought to reserve extensive powers to settlors was that the intended transfer of trust assets might be interpreted as a testamentary disposition under the Wills Act 1988 with the consequence that assets remained in the personal estate of the purported settlor.3 Generally, the new law paves the way for the creation of valid trusts where the settlor may retain (or grant to a trusted family friend, protector or beneficiary) a fairly large degree of control over the wealth settled on trust, providing international settlors with the flexibility they seek.

The TAA 2014 expressly states that any and all of the following interests or powers can be reserved by the settlor,4 or granted to a third party:

in the case of a reservation to the settlor or other donor of trust property, a power to revoke the trust in whole or in part;

a power to vary or amend the terms of a trust instrument or any of the trusts, purposes or powers arising there under in whole or in part;

a power to decide on or give directions to advance, appoint, pay, apply, distribute or transfer the trust property;

a power to act as, or give directions as to the appointment or removal of, directors or officers of companies owned by the trust, or to direct the trustees how to exercise voting rights with respect to the shares of such companies;

a power to give directions as regards investments or the exercise of any powers or rights arising from such trust property;

a power to appoint, add, remove or replace any trustee, protector, enforcer or other office holder or advisor;

a power to add, remove or exclude any beneficiary, class of beneficiaries or purpose;

a power to change the governing law and the forum for administration of the trust; and

a power to restrict the exercise of any powers, discretions or functions of a trustee by requiring that they shall only be exercisable with the consent, or at the direction, of a person or the persons specified in the trust instrument.

This is a very wide suite of powers, but it is comparable to similar lists found in parallel statutes in the Cayman Islands, Jersey, Guernsey and some other offshore jurisdictions. It may be that Bermuda has a slightly wider list than a few other jurisdictions, but there is not much in it.

THE POWERS’ EFFECT ON TRUSTEE DUTIES AND LIABILITIES

The TAA 2014 makes it clear that trustees will not be in breach of their fiduciary or equitable duties for complying with the valid exercise of the powers listed in the Act.5

The TAA 2014 also provides that no person (unless formally appointed as trustee and holding a vested interest in trust property) will be deemed to be a trustee by reason only of the grant or reservation of any of the powers specified in the TAA 2014.6 This helpfully avoids the unintended consequences of settlors or protectors being deemed to be trustees by virtue of their control over the trust property, which could mean that the tax residence or situs of a trust could be deemed to be a high-tax jurisdiction. It could also mean that certain duties could apply to the relevant settlor or other power-holder unexpectedly. Many of the other offshore jurisdictions do not expressly clarify this point.

PRESUMPTIONS ON WHETHER A POWER IS FIDUCIARY

The TAA 2014 also clarifies that the terms of a trust deed governed by Bermudian law may expressly provide that the person who holds the powers listed in the Act shall not be subject to a fiduciary duty.7 This approach (unique to Bermuda)8 is useful where, for example, powers are being given to protectors who may be trusted family friends and on whom there is no desire to impose strict fiduciary standards of liability. For example, if the settlor is a beneficiary and holds a power to appoint trustees, it may well be desirable and reasonable that the settlor be able to exercise that power either for their own benefit or at least without the exercise being subject to review by the beneficiaries in court from a fiduciary duty standpoint. After all, it is the settlor’s property that is gifted into trust, and therefore it should be subject to such conditions as they may dictate. This approach reinforces the public policy in favour of freedom of disposition of one’s property.

Uniquely, the TAA 2014 provides certainty by creating statutory presumptions on the fiduciary nature of the reserved powers. The new presumptions apply to Bermuda trusts created after the new legislation comes into force and are subject to overriding contrary intention in the trust instrument.9 For such new trusts only, it shall be presumed that:

if the powers are granted to a beneficiary or reserved by a settlor, those powers will be personal and non-fiduciary (as long as the power-holder is not the sole trustee); and

in any other case, the powers will be fiduciary.

By setting out presumptions, Bermuda’s amended legislation not only creates certainty, but also flexibility, since the presumptions can be overridden by express terms in the trust.

LIMITING TRUSTEES’ DUTIES

Another innovative and progressive provision adopted under the TAA 2014 is found at subsection 2A(4), which allows the settlor to choose, in limited circumstances, to limit the persons to whom trustee duties are owed to the power-holder (during their life). The subsection provides that, where a person holds a power to revoke, a general power of appointment, or the present beneficial interest, the trust instrument may provide that, for so long as the settlor, beneficiary or other holder of the power is not the sole trustee, the trustee will owe no duty to any other person in relation to that part of the trust property affected by the powers or interest referred to above. A similar provision is contained in the California Probate Code and US Uniform Trust Code. This is rare in the offshore trust world but logical in some cases when designing trust terms.

With regard to the ‘present beneficial interest’ test, the intention here is that, where a beneficiary is the sole lifetime beneficiary of a trust, the fiduciary duties with respect to that trust property can reasonably be limited to that beneficiary if the settlor so wishes. This sort of provision is commonplace in the US trust and estate practice, as regards certain versions of the grantor trust form.

Subsection 2A(4) may have the effect of enabling trustees to limit disclosure of trust information and accounting to the relevant beneficiary and/or settlor who holds the power to revoke or general power of appointment.

In the case of the general power of appointment, this provision de facto categorises the power-holder as the primary beneficiary of the trust, even if it is technically possible that that person might not be within the otherwise defined class of beneficiaries. This is logical since the person holding a general power of appointment is in a position of control and, for bankruptcy purposes, it is arguably tantamount to ownership.

CONCLUSION

These new legislative provisions will render Bermuda trusts more attractive to the international settlor. In particular, they will appeal to clients from jurisdictions that do not recognise trusts, since clients from such jurisdictions are often unfamiliar with the trust concept and reluctant to release full control over their assets to trustees.

The new legislation provides clarity as to what interests and powers can be retained or granted to third parties. It also provides flexibility, where, for example, a settlor wishes to appoint a family member to oversee certain aspects of the trust administration (e.g. monitoring of investment managers), and at the same time ensure that they are absolved of any fiduciary liability.

Bermuda now has the most comprehensive reserved powers legislation of any o_ shore jurisdiction, emphasising its position as a modern and sophisticated domicile for international trusts.

Footnotes

1 Which include, inter alia, power to revoke and a general power of appointment

2 It must be a ‘limited beneficial interest’; otherwise beneficial and legal ownership has not been bifurcated into trust

3 The requirement for certain formalities to create a valid testamentary disposition was of particular concern in this context

4 ‘Settlor’ is defined, in this part of the TAA 2014, to include a testator who grants powers under a testamentary trust and a person who declares a trust over assets held beneficially by that person (subsection 2A(9))

5 Subsection 2A(3)(a) and (b)

6 Subsection 2A(5)

7 Subsection 2A(6)

8 We believe this approach is unique in the o. shore world, but note that Guernsey provides automatically that all such powers are non-fiduciary, subject to the terms of the trust

9 Subsection 2A(7)