Column: Do Executives & HNWs Need A Trust?

[Written by Ashley Fife]

In a recent column, I discussed why Bermuda-based executives and other high net worth individuals in particular should consider making a Bermuda will, and what may happen if they do not. I also provided an introduction to estate planning [including formation of trusts] and business succession planning.

This column outlines what a trust is, why Bermuda executives and other persons with considerable high net worth may wish to form a Bermuda law trust during their lifetime to benefit themselves and/or their family. I also consider circumstances where a trust might not be appropriate. This column is in respect of Bermuda law as at the date of the column, is of a general nature and is not a substitute for legal advice.

Why might executives and HNWs consider forming a trust?

There are many good reasons to consider forming a discretionary family trust to:

• provide flexible succession planning to you family and descendants [potentially over multiple generations];

• protect assets from your and other family members’ creditors;

• provide a fund to support incapacitated adult children or family members who have difficulty managing their money;

• ensure there is someone [i.e. a trustee] to manage and provide benefits to you and/or your family in the event you are incapacitated;

• facilitate tax efficiency [for you and your family] during your lifetimes – including in circumstances where one or more family members may be situated in different jurisdictions [with different systems of taxation] or contemplating a move;

• minimise or eliminate stamp duty or other tax charges that might otherwise be payable upon your death;

• provide continuity of administration of assets in the trust following death [without the assets having to pass through a probate or administration process]; and

• give legal effect to broader family objectives [that are sometimes reflected in a family constitution or charter, which are often not binding].

When is a good time to form a trust?

There are good reasons to form a trust sooner rather than later, provided you [the settlor]:

• have sufficient wealth to justify the time and costs involved to form the trust and have the trust properly administered [including having reporting obligations, such as "FATCA" and "CRS" reporting properly discharged];

• take the time to obtain a working understanding of trusts and how you consider a trust might operate to meet your objectives; and

• obtain legal and tax advice [from appropriate advisers regarding tax, reporting and other relevant implications of the trust under the laws of jurisdictions with which the settlor and proposed beneficiaries are connected].

The sooner a trust is established, the sooner you and your family can enjoy the benefits that may be provided by the trust structure, and the stronger a position you and the trustee will likely be in to resist claims against trust property from your subsequent creditors.

For example, a creditor of yours might seek to argue that you transferred property into the trust with the dominant intention of defeating his or her claim, that therefore the trust should not be deemed invalid and the “trust property” be available to discharge the creditor’s claim.

What is a trust?

A trust [sometimes called a settlement] is a fiduciary relationship whereby a person [often known as the settlor or grantor] transfers ownership of property to a trustee to hold, invest, administer and distribute to beneficiaries [and/or apply for philanthropic, charitable or other purposes] in accordance with the terms of a trust instrument and the duties imposed by law.

A trust is not a legal entity, in contrast to a company for example. A trust cannot enter into contracts or own property. It is the trustee that may enter contracts and hold property in its capacity as trustee of the trust.

The term “discretionary trust” is not a term of art, but essentially refers to a trust with terms providing the trustee powers to make distributions of property held in the trust to such one or more beneficiaries of the trust at such times and in such proportions as the trustee considers appropriate after considering all materially relevant considerations.

How is a trust formed?

In contrast to companies, trusts are not incorporated and there is no register of trusts in Bermuda. Trusts are typically established by a trust instrument [also known as trust deed, settlement deed or trust indenture], signed by the settlor and the trustee, whereby the trustee declares that it holds a nominal sum [e.g. USD$100] on trust for the benefit of the beneficiaries pursuant to the terms of the trust instrument with more substantial value added to the trust fund later.

Trust instruments and reservation of powers

Trusts instruments are flexible and can be tailored to reflect the settlor’s objectives. I emphasise that property transferred into the trust [now trust property] is no longer owned by the settlor. However, it is possible for the settlor to be a beneficiary of the trust or for the trust’s terms to grant the settlor or other persons one or more powers to, for example, appoint or remove trustees, revoke the trust, direct the trustee or veto trustee decisions whether they be in relation to distributions of trust property or investment of trust property.

Generally, from tax and asset protection standpoints, a settlor should carefully consider the nature and amount of powers he or she reserves. Often, the fewer powers reserved, the better from thee perspectives.

Trusts instruments are private documents and, unlike probated Wills, are not accessible by the public.

What types of assets can trustees hold?

Trustees of a Bermuda law trust can, subject to the trust’s terms, hold all types of assets [wherever the assets are situated] that are legal for a person to hold under Bermuda law- which may include interests in operating companies, investment companies, private equity or other funds, bonds and other financial investments, real estate, artwork, yachts, planes, digital assets and so on.

Some trustees have reservations about holding certain types of assets [or may struggle to obtain insurance to cover their risks for doing so]. This can have an impact on the choice of trustee and the trust’s terms among other things.

Trusts and the family home

Over the years, prior to the availability of the family homestead exemption from 1 April 2005, many trusts were established in Bermuda with the family home being the trust’s primary or sole trust asset. One reason for this may have been to ensure, for stamp duty purposes, the family home did not form part of the settlor’s deceased estate.

If a deceased’s estate includes Bermuda real estate and/or other Bermuda property, subject to exemptions, the value of that property would be included in the affidavit of value filed at Court in support of the application for probate or administration of the deceased’s estate.

Affidavits of value are chargeable with duty at ad valorem rates of up to 21 percent of the value of chargeable Bermuda property forming part of the deceased estate. The value of a gift of the property to a spouse is deducted for the purpose of calculating duty. However, gifts to others [for example, the deceased's children] are not deductible.

The family homestead exemption enables a person with Bermudian status [or their executors or administrators] to apply to the Tax Commissioner to designate the person’s interest in one residential property in Bermuda as the person’s primary homestead. If successfully designated, the home is not included as part of the value in the affidavit of value that is chargeable with stamp duty.

Following the availability of the family homestead exemption there may be less reason from a stamp duty perspective to form a trust with the family home as the sole trust asset. However, there are many Bermuda real estate owners who do not have Bermudian status or do not otherwise qualify for the family homestead exemption.

There are important stamp duty considerations when deciding whether or not to transfer Bermuda property into a trust fund. However, there remain compelling reasons to structure ownership of a family home with a trust. For example:

• the family home is of significant value and you are involved in business or other activities that may expose you [and the family home] to claims;

• the family home has sentimental or historic significance and would likely be retained in trust to benefit multiple generations;

• the family home is one of a number of valuable assets forming part of the trust fund.

Bermuda land [i.e. real estate] can be held by trustees in trust for a maximum of one hundred years.

Conclusion

The trust has been used for centuries in common law jurisdiction as a vehicle to protect and structure a family’s wealth. Bermuda trust law is largely derived from common law principles as reflected and evolved by Bermuda’s trust legislation and is very well regarded internationally. Trusts remain effective succession planning vehicles for high-net worth families.

Increased regulation and other factors has contributed to an increase in the time and costs in administering trusts over the years. Bermuda has long had a buoyant and respected trust industry with trustees of trusts, formed by settlors from Bermuda or abroad, holding assets of significant value. The next article will explore who one might appoint as trustee of a trust [e.g. one or more of your trusted friends or advisers, licensed trustee, private trust company.]

- Ashley Fife, Counsel, Carey Olsen Bermuda Limited, can be contacted at ashley.fife@careyolsen.com

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

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