Offshore Services- Bermuda

Bermuda's legislation is designed to make the formation of Bermuda private trust companies quick, easy and relatively inexpensive compared to many other jurisdictions. Over the past several years the use of a Bermuda private trust company in combination with a purpose trust has been increasingly attractive to many clients, including those from civil law countries, those wishing to establish a family office structure and those who do not wish to use institutional trust companies.

Definition

A 'Bermuda private trust company' is a company with trustee powers which does not require licensing under Bermuda's trust legislation, the Trusts (Regulation of Trust Business) Act 2001, provided that: (i) it is not carrying on the business as a trustee (ie, in essence, it cannot offer its services to the general public); and (ii) it is empowered to act as trustee of only a limited number of identifiable trusts under the terms of its memorandum of association.

A private trust company must also certify to the Bermuda Monetary Authority in writing that it qualifies for the exemption from licensing and provide a description of the trust that it administers. There are no minimum share capital requirements for a private trust company.

Advantages

The advantages of using a Bermuda private trust company are as follows:

Cost - unlike in many other jurisdictions, a Bermuda private trust company is not subject to an expensive licensing process. Accordingly, in some cases the fees related to the formation and ongoing administration of the structure will be less than those charged by an institutional trustee. This is especially true for large trusts where an institutional trustee charges on an ad valorem basis.

Familiarity - many settlors from civil law jurisdictions are unfamiliar with trust concepts. The combination of a trust and a private trust company is similar in effect to a corporate or foundation structure.

Efficiency - the absence of licensing makes it easier, quicker and less expensive to make changes to directors, officers or other structural elements. Many families have complained about the costs and time involved in changing trustees. With a private trust company, all that is required is a change of directors or the termination of the trust administration agreement.

Comfort - many families are hesitant to transfer legal ownership of significant assets to an institutional trust company in an offshore jurisdiction. Families may be more comfortable having their assets owned and administered by a private trust company that they have created and perhaps control (depending on the tax and other factors affecting the settlor and the beneficiaries).

Control - most trusts require that the trustee exercise its discretion in the administration of the assets (eg, the investment or distribution of trust assets). The structure of a private trust company enables family members or trusted advisers to be involved in the decision-making process by becoming directors or consultants to the private trust company.

Privacy - many families are concerned about the disclosure of information on the family's assets and activities. Using a private trust company makes it easier to control access to and disclosure of confidential information. This is especially true where the board of directors consists of the family and its trusted advisers.

Consolidation - many institutional trustees are unwilling to hold certain types of asset. The private trust company does not have similar constraints and all the assets can be administered by a single trustee.

Integration - a private trust company integrates easily with a family office, an operating company or a private philanthropic trust. It is possible to share a common name, board of directors and administrative facilities.

Board of Directors

Bermuda law requires a company to have a minimum of two directors who are individuals. Corporate directors are not permitted. The board may - but need not - include one or more Bermuda-resident directors. The board of directors provides an opportunity to create a roundtable forum in which family members can participate, perhaps with trusted advisers. Family members can be reasonably assured that there is a sufficient understanding of the family's background and dynamics, and that their wishes regarding the administration of the underlying trusts will be carried out. Board meetings may be held anywhere. It is also possible to create various committees that will advise the board (eg, investment or audit committees).

Who Uses Private Trust Companies?

Private trust companies are commonly used by wealthy families as a replacement for institutional trust companies or as part of their global planning. It is usual for a private trust company to be formed to act as the trustee of one or more private family trusts or connected trusts. These might be separate trusts for family members that each own shares in:

• a single or common operating company;
• trusts holding non-income producing assets (eg, yachts, aircraft and real estate); or
• charitable trusts used by the family in their philanthropic activities.

Private trust companies can also be used to act as trustee of commercial trusts. For example, a financial institution will form a wholly owned private trust company to act as trustee of in-house collective investment trusts (eg, unit trusts or mutual funds). Private trust companies might also be used to own special purpose vehicles that are used in financing or other structures.

Who May Own Private Trust Companies?

Care must be exercised in deciding who will own the shares of the private trust company. Ownership can create tax and other problems. While the company may be owned by an individual or a company, it is generally thought to be undesirable that the ownership should have - or be perceived to have - any link with the settlor or any beneficiary of a trust administered by the private trust company. For this reason, the majority of private trust companies are 'orphaned' (ie, the shares are owned by a purpose trust) or are created as companies limited by guarantee (ie, a company without share capital).

Common Purpose Trust Structure

In contrast to a traditional family trust, a purpose trust does not and cannot have beneficiaries; the trust assets must be used only for the purpose specified in the trust document. Where a purpose trust owns the shares of a private trust company, it will be established for the exclusive purpose of incorporating the private trust company and acquiring, holding and generally dealing with those shares. There are no beneficiaries of the trust and no one has ownership rights over the shares. Therefore, the purpose trust is an ideal vehicle for ownership of the private trust company where personal ownership can create tax or other problems.

International Law Office