Trusts in Bermuda
What is a trust and what is its purpose?
A trust is a legal instrument where you name a person (“trustee”) to hold and manage property for the benefit of another (“beneficiary”). You then transfer property into the trust by changing its ownership so that it is owned in the name of the trustee instead of in your name. It is a versatile estate-planning tool and is a commonly-used alternative to a will, because it allows you to control the circumstances under which the beneficiaries receive or benefit from the trust property whilst you are alive. For example, you can set up a trust for your minor children and state that they are not to receive the property until they are age 30 (whereas under a general property guardianship they would receive it when they reached the age of majority). You can put your son’s inheritance in trust to protect it from the claims of his creditors or from his own irresponsibility with money. You can even place your property in trust and name yourself as beneficiary in the event you become unable to manage your own financial affairs.
The trust cannot be used for an illegal purpose or one that is contrary to public policy.
I already have a will. Why should I create a trust?
A trust allows you to do many things that you can’t accomplish with a will. You can protect assets from creditors, possibly minimize the effects of estate taxes, or provide for the support and maintenance of beneficiaries over a period of time. For example, if you leave money to your child under your will, he will receive it when you die. But if you put the money in a trust and name your son as beneficiary, you can control the amount he receives on a regular basis and can prevent him from squandering away large sums of money by spreading the payments out over a period of time.
TIP: It is a good idea to have a will even if you decide to create a trust, because the will can accomplish things that cannot be done with a trust (e.g., naming a guardian or an executor). Also, if you die owning any property that was not transferred into a trust, then it can pass under the will (usually through a specific provision or under the residuary clause) and avoid any intestacy.
What types of trusts which are typically used in Bermuda?
There are many types of Trusts, but the most common ones for estate purposes are:
- Testamentary: A testamentary trust is set up through your will and becomes effective on your death. Basically, you designate certain property in your will to be held in trust after your death. The trust can be revoked or modified while you are alive, but becomes irrevocable after your death. It passes through probate because it is created by your will.
- Discretionary: A discretionary trust is one that gives the trustee power to decide how much and when to pay out to a beneficiary. The trust’s property is protected from the beneficiary’s creditors until the trustee decides to pay out any money, but then he must pay it directly to the beneficiary’s creditors.
- Charitable: A charitable trust is in favor of a specific charity or group of unnamed beneficiaries. It must be created to accomplish a charitable purpose that benefits the public.
Assets may be settled in trust for an indefinite period of time (except for land in Bermuda), providing privacy and long-term estate planning protection. Moreover, the assets will be immediately available for the benefit of chosen beneficiaries, without the necessity of applying for Probate, which can prove both lengthy and expensive. The rate of stamp duty payable on the settlement of Bermuda property to Bermuda trusts is as follows:
$250 plus: Nil
From $50,001 to $200,000 5%
From $200,001 to $1,000,000 10%
Over $1,000,000 15%
The rate applicable on the addition or subsequent transfer of Bermuda property to a Bermuda trust is as follows:
Up to the point at which the total amount of
any duty paid on Bermuda property equals
$7,750 in the aggregate 5%
On the next $500,000 10%
Despite the applicable stamp duty, there are still advantages in settling assets in trust. For example, settling assets in trust protects against the possibility that rates of stamp duty or property values, or both, may increase prior to death. Assets in trust are protected from the lack of experience of children and may reduce creditors’ claims and matrimonial and dependants’ claims, provided that the terms of the trust contemplate such administration claims.
It is now also possible for Bermudian residents to convert fairly substantial amounts of Bermuda dollar cash to foreign currency. Foreign currency assets may be transferred to a trust without payment of stamp duty.
Non-Bermuda property settled on a Bermuda trust remains free of duty, provided that at least one of the trustees is a Bermuda resident, regardless of the nationality of the person transferring the property to trust.
Who should I name as trustee?
You can name anyone that you want as long as the person is competent. Be sure the person you select is someone that you trust with your personal affairs. Common designations are in favor of family members, though some people choose to hire a professional trustee, such as a bank or law firm (which usually charges a fee).
I forgot to name a trustee. Is my trust invalid?
No. If you forgot to name a trustee, or if the one that you named is unable or unwilling to serve, the court will appoint one for you and the trust remains valid.
I am named trustee of a trust. What do I need to do?
Your duty is to administer the trust in good faith and as a reasonably prudent person. You must act in the best interests of the beneficiaries and according to the directions set forth in the trust instrument. You are required to protect and preserve the trust’s assets, invest them in a manner that will increase their value, and make timely distributions to the beneficiaries. You may not mix the trust’s assets with your own, loan to or borrow money from the trust, or use your position as trustee in an improper manner.
TIP: The administration of a trust can be a time-consuming task. If you feel you need help, you can hire a professional (i.e., attorney or accountant) to perform this duty.
Does a named trustee have to serve?
No. The trustee can refuse the appointment as long as they haven’t assumed any of the trustee’s duties. If the trustee accepts the appointment but subsequently decides that they no longer want the responsibility, they can resign (and if necessary with the court’s approval, if falling below the requisite number of trustees perscribed by law or by the trust instrument).
When can a trustee be removed from office?
The court will remove a trustee from office whenever it feels that the trustee could jeopardize the trust. Common grounds for removal are commission of a serious breach of trust for example, fraud on the trust powers, the trustee is unable to carry out his responsibilities (e.g., he is imprisoned), or he does not get along with the beneficiaries.
What issues should I consider when designating beneficiaries?
You can select as beneficiary any person or organization capable of taking title to property (charities and unborn individuals are acceptable beneficiaries; pets and unincorporated associations are not). The beneficiary does not have to identified by name, but must be capable of being identified when it is time to distribute the interest. For example, if you want to leave property in trust for your sister’s future children, you can do so even if you do not name them because it is possible to determine who the children are when it is time to distribute their interests.
Can I be a beneficiary of a trust that I create? Why would I bother doing that?
Yes. But you cannot be the only beneficiary and the only trustee. In that case, the title is said to “merge” and there really is no trust. One reason for placing your assets in trust for yourself is so you can appoint a co-trustee who will manage your affairs in the event you become sick and unable to do so yourself. In that event, the trustee can invest your assets, sell them if necessary, and make regular interest payments to you or on your behalf.
Can a beneficiary transfer his interest in the trust to another person?
Yes, unless the trust contains a “spendthrift clause.” A spendthrift clause prohibits the beneficiary from transferring his interest to another, and it also protects his interest from the claims of his creditors (unless the creditor is a dependent or the government). However, once the property is distributed to the beneficiary it loses its protection and the beneficiary can do whatever he wants with it (and his creditors can lay claim to it).
TIP: If the beneficiary of your trust is someone who is incapable of handling his financial affairs, is irresponsible with money, or has a lot of debt, a spendthrift clause is crucial. Without one, the trust property could disappear quickly.