Bermuda has historically flown beneath the radar when it comes to promoting itself as the ideal location for the establishment of a family office. There are likely a number of reasons for this, but one is that Bermuda was often chosen as a domicile for trusts or for the location of a physical family office precisely because the family could rely on Bermuda for quiet professionalism, a high quality of service but also discretion among its service providers. However, there are a significant number of family offices established in Bermuda – although there is no official survey of their number. What can be said is that the overall value of the trust business to Bermuda is significant, with hundreds of billions of trust assets under management on the island.
The focus on family service and the respect for privacy remain at the heart of fiduciary service in Bermuda. But with the changing dynamic of multiple offshore jurisdictions competing for key clients in a world that must respond to numerous challenges and changes – such as the rise of the millennial and the impact and ever-increasing cost of regulatory compliance and multinational reporting regimes – it is inevitable that Bermuda has sought to promote itself as a trust and family office domicile of choice. This shift in emphasis can perhaps be traced to the formation of the Bermuda Business Development Agency as a public-private partnership in 2013 to promote business. The agency has several sector-specific focus groups comprising industry leaders and the family office has been a focus of the trust and private-client focus group for some time. Bermuda also has an active branch of the Society of Trust and Estates Practitioners (STEP), with almost 200 members. The STEP Bermuda branch's annual conference in 2016 was dedicated to the key advantages of Bermuda as a centre of excellence for a family office.
Insurance and reinsurance markets
While Bermuda's dominance in the insurance and reinsurance markets came later than its development as a trust domicile (Bermuda is now the second most important reinsurance market in the world, surpassed only by the City of London), it would be wrong to see private wealth as subsidiary business to that of insurance. In fact, Bermuda as a trust domicile and as a location for family offices derives significant benefit from Bermuda's success in insurance. Many of the world's most important insurers and re-insurers have offices, staff and key operations in Bermuda. This drives not only the local economy and results in an exceptionally high standard of living on the island, but it also means that the banking sector and professional service firms provide world-class service across their entire client base, including trustees and families.
In addition to this professional service culture is the Bermuda Monetary Authority, which regulates the licensed trustee sector. Bermuda has 28 licensed trust companies regulated by the authority under the Trusts (Regulation of Trust Business) Act 2001. However, private trust companies are exempt from authority regulation under this legislation and their incorporation and management are governed by the Companies Act 1981. Among Bermuda's licensed trust companies there are several global players as well as high-quality Bermuda-specific firms. Family offices established in Bermuda draw on the breadth of talent that the licensed trust company sector promotes.
Bermuda trust law is supportive of the family office sector due to its basis on English equitable principles and the fact that its trust statutes have often been developed from English statutory law. The classic discretionary trust (usually with protector provisions) remains the most common form of Bermuda trust structure and Bermuda has so-called firewall legislation to protect properly established and funded Bermuda law trusts from attack based on foreign inheritance, matrimonial or insolvency claims. This legislation is expected to be revised and modernised in 2019. In what remains a significant departure from the English trust law historical background, Bermuda passed purpose trust legislation in 1989 which permitted the establishment of non-charitable purpose trusts. These are popular for families or businesses wishing to develop a trust structure for a business or philanthropic purpose and are often employed at the top of a structure to hold the shares of a private trust company. While as initially enacted in 1989, Bermuda purpose trusts were required to have an enforcer, this requirement was relaxed in 1998 and a range of persons with sufficient interest can now make an application to the Supreme Court to enforce a purpose trust. This change also resulted in purpose trusts becoming less complex and expensive.
A more recent innovation was the amendment of Bermuda's trust legislation in 2014 to enumerate the powers which may be reserved to a settlor or given to a third party, such as a protector. Prior to this reform, it was common to see such reserved powers in Bermuda law trusts. While the legality of such powers was not questioned (and, in general terms, had been recognised in legislation since 1989), it was thought preferable that Bermuda law be developed to make it clear that such powers are and always have been valid. This reforming legislation also provided innovation in the form of a presumption as to whether, going forward, such powers were to be construed as fiduciary and express recognition that a trustee who acted in accordance with such reserved powers would not thereby commit a breach of duty.
The Perpetuities and Accumulations Amendment Act 2015 made the process for perpetuating Bermuda law trusts more straightforward. The amendment to the Perpetuities and Accumulations Act 2009, introduced by the 2015 Amendment Act, has resulted in significant interest among practitioners. It has also seen several high-value trusts redomiciling to Bermuda to take advantage of the flexibility of the Bermuda courts to perpetuate old trusts which require restructuring. Prior to the 2009 act, the perpetuity period under Bermuda law was 100 years. The 2009 act effectively abolished the rule against perpetuities as a matter of Bermuda law prospectively, except for trusts which held Bermuda land. Thus, in respect of trusts holding assets for ultra-wealthy international families established on or after 1 August 2009, those trusts could be of indefinite duration, which is appealing to settlors interested in a dynastic settlement.
With regard to trusts which had been established prior to 1 August 2009, there was no straightforward method to perpetuate them. The 2015 Amendment Act addressed this issue with an amendment to Section 4 of the 2009 act. This Section now provides that the Supreme Court has clear jurisdiction to grant an order on the application of the trustee of such trusts extending the duration of Bermuda law trusts which were in existence prior to 1 August 2009 (again excluding trusts of Bermuda land) or trusts governed by a foreign law (whether established prior to or after 1 August 2009). The test to be applied by the courts under Section 4 is a discretionary one, "as [the court] thinks fit".
This statutory amendment has resulted in several reported cases before the Supreme Court in which the court considered the test to be applied when perpetuating trusts. Section 4 was first considered in Re The C Trust (2016 SC (Bda) 53 Civ), where Chief Justice Kawaley held that it was appropriate to grant relief under Section 4 on an ex parte application by a trustee provided that the court was comfortable that any adverse impact on beneficiaries had been properly considered and presented to the court. The principles which Kawaley set out in C Trust were:
- that the court should not act as a 'rubber stamp';
- that the court should consider the best interests of all parties, broadly defined and looked at as a whole; and
- the fact that extending the duration of a trust will dilute the economic interests of existing beneficiaries and will ordinarily be an irrelevant consideration.
This latter point is an important one given that ultimate default beneficiaries are not ordinarily intended to benefit in fact by a settlor but rather are added to any structure to avoid wealth resulting to the settlor at the end of a fixed-trust period.
More recently, in In the Matter of the G Trusts (2017 SC (Bda) 98 Civ), the court granted the application to extend the duration of trusts which had redomiciled from Cayman to Bermuda. The factors which Kawaley considered in granting the application included:
- that the family whose wealth was held in the G Trust genuinely looked upon wealth as dynastic in nature; and
- that the enormous distribution of wealth to the generation that happened to be in existence at the conclusion of the existing perpetuity period could be detrimental in a number of respects, including in respect of taxation and the resulting dissipation of the family wealth.
The ability to establish new perpetual trusts and to perpetuate older structures has added to Bermuda's reputation as the pre-eminent jurisdiction for complex and high-value trust restructuring. In addition to perpetuation, Section 47 of the Trustee Act 1975 has been successfully used for many years to restructure trusts via a court process without the need to join as parties or seek the consent of all members of the beneficial class. This is beneficial in the case of discretionary trusts with very wide classes or where active consent is unattractive due to the fiscal consequences. Section 47 provides that the courts may grant a trustee the power to affect a transaction provided that the proposed transaction is 'expedient' (ie, expedient for the trust as a whole). A transaction may still pass the expediency test if it is expedient for one beneficiary but neutral for another. The definition of 'transaction' is much wider than in similar legislation in other jurisdictions and this has allowed the Bermuda courts to grant a trustee power to amend a trust, including the beneficial interests held under the trust. In GH, IJ v KL (2011 SC (Bda) 23 Civ), Chief Justice Ground rejected the suggestion that tax implications should be ignored when considering expediency, saying:
if the proposal is otherwise plainly expedient, then there is no limitation in the statute which prevents its sanction simply on the grounds that it is designed in the interests of tax efficiency, and nothing to justify my importing such a restriction.
Several recent cases have also reaffirmed the principles upon which the Bermuda courts will act when being asked to anonymise public records of court proceedings (and judgments) and permit hearings in private in order to maintain confidentiality. The most important consideration of this issue was again in G Trusts , where the chief justice reaffirmed the Bermuda courts' practice of anonymising trust cases in non-contentious cases. Importantly, this decision followed and specifically considered the impact of press coverage of Bermuda trusts as a result of the publication of the so-called Paradise Papers. In deciding that this practice was constitutional and ought to continue in appropriate cases, Kawaley noted that:
Persons administering, interested in or settling Bermuda trusts should rest assured that this Court's firmly established practice of making confidentiality orders in appropriate cases, which is merely designed to enable law-abiding citizens to peaceably enjoy their actual and contingent property rights, has a venerable legal basis. The existing practice will continue to be applied in appropriate cases such as the present.
Another trend in Bermuda trust cases is that of trustees increasingly seeking the assistance of the court when taking momentous decisions. The court's ability to grant blessing to trustees (often referred to as the Public Trustee v Cooper jurisdiction after an English case of that name) has been exercised for many years but prior to 2014 had resulted in only one or two reported cases. However, there have been several important cases concerning trusts of significant value. One example was In the Matter of A Trust (2018 SC (Bda) 42 Civ), where the court considered such an application in which trustees sought approval for their decision to permit a company that they controlled to make a substantial investment. In exercising this jurisdiction, the court was ordinarily testing the trustees' decision making against what a reasonable body of trustees would have decided and the court asked whether the trustees had considered any irrelevant, improper or irrational factors. Importantly, the court considered the proper approach to expert evidence and decided that it was not enough for the trustees to adopt an unquestioning approach to their own expert evidence when presented with evidence from opposing beneficiaries. The court approved the trustees' decision to enter into the transaction.
The abovementioned case law is but a small sample of the range of interesting decisions in high-value trust cases that have emanated from the Bermuda Supreme Court in recent years. Many of these are non-contentious cases which deal with the court's powers to assist with various kinds of trust restructuring. Almost invariably, this case law emanates from trust structures held for the benefit of international ultra-high-net-worth families. The recent legislative reforms are helping to drive the trust business sector in Bermuda. Coupled with this, the Bermuda government has recently developed a fintech strategy with the passage of several pieces of legislation aimed at encouraging business in this sector, including the Digital Asset Business Act 2018.
These legal developments bode well for the family office sector and meet the challenge head on of making the Bermuda trust fit for purpose for the next generation of ultra-high-net-worth families. To pick up on the theme of the STEP Bermuda 2016 conference, Bermuda rightly considers itself a centre of excellence for the family office.
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