Offshore Services- Bermuda

Many Bermudians have placed their assets in a trust for the benefit of themselves and their families. One of the first decisions to be made concerns the selection of the trustees; generally speaking, there are three options:

• institutional trustees;
• individual trustees; or
• private trust companies.

There are advantages and disadvantages to each type of trustee.

Institutional trustees offer certain advantages over individual trustees, including a staff of trust professionals, protection and longevity. However, institutional trustees will charge a fee, which can often be avoided by using individual trustees (as a general rule, individual trustees cannot provide trust services as a business, unless they are licensed). However, when individuals ask a relative to act as trustee, they should appreciate that a trustee may be personally sued for their actions as a trustee. Therefore, a trust company with limited liability may be a more attractive option.

One interesting trend is the increased use of private trust companies where assets are significant. A private trust company has trustee powers and does not require licensing under Bermuda's trust legislation, the Trusts (Regulation of Trust Business) Act 2001, provided that it fulfils two criteria. First, it cannot carry on business as a trustee (in essence, it cannot offer its services to the general public). Second, it is empowered to act as trustee of only a limited number of identifiable trusts that would typically be for the benefit of related persons or family members.

Unlike public trust companies (where the minimum capital requirement is $250,000), there is no minimum capital for private trust companies, which can be structured as an ordinary Bermuda local or exempted company or as a company limited by guarantee 'owned' by its members.

Where a private trust company is structured as an ordinary local or exempted company, care must be exercised in retaining ownership and/or control over it, since doing otherwise could produce adverse tax and other consequences. Therefore, it is common to have the private trust company 'orphaned' (ie, owned by a Bermuda purpose trust). A private trust company can also be attractive to institutional trustees which are concerned about the increased risk of litigation focusing on trustees' actions. Institutional trustees can often earn the same fees by providing 'trustee-like services' under a service agreement and avoid the fiduciary obligations and liabilities imposed on trustees.

Bermuda private trust companies have several advantages which are making them increasingly popular, including:

Cost - there is no expensive licensing process (as in other jurisdictions) and private trust companies are thus relatively cost-effective to set up and administer. The running costs of large trusts are often lower than the fees charged by some institutional trustees that have compliance burdens and overheads.

Familiarity - families from jurisdictions that are unfamiliar with the trust concept appreciate and better understand the private trust company concept. Private trust companies may be compared to structures that are familiar to them, such as corporate or foundation structures.

Comfort - people are often more comfortable having significant assets administered by a private trust company that they have created and possibly own or control by way of representation on the board.

Privacy and confidentiality - private trust companies afford privacy and confidentiality about the family's assets and their activities.

Efficiency - the absence of licensing makes it quicker, easier and cheaper to make changes to directors, officers or other structural elements. Changing institutional trustees in a traditional trust structure can be time consuming and costly due to the change in ownership of assets and the retiring trustee's demands for more comprehensive indemnities to protect against litigious beneficiaries and potential onshore tax liabilities. With private trust companies, all that is required is a change of directors or the termination of the administrative services agreement with the institutional trust company.

Control - rather than institutional trustees making decisions on the trust assets, the use of the private trust company structure enables family members or trusted advisers to be involved in the decision-making process by becoming directors or consultants to the private trust company.

Trust investments/risk - institutional or professional trustees prefer to hold a diversified portfolio of low-risk investments. Private trust companies do not have similar constraints.

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

A private trust company may be a very useful vehicle where the circumstances are right and the company is correctly structured.