Bermuda – the family office proposition

The focus on family service and the respect for privacy still remains at the heart of fiduciary service on the island. 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, 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 (BBDA) as a public–private partnership in 2013 to promote business on the island. The BBDA has a number of sector-specific focus groups made up of industry leaders and the family office has been a focus of the trust and private client focus group for some time. Bermuda also has a very active branch of the Society of Trust and Estates Practitioners with almost 200 members. The STEP Bermuda Branch’s annual conference in 2016 was dedicated to Bermuda as a centre of excellence for the family office. That conference looked at key advantages that Bermuda has as a location for a family office (either single family or multi-family) and it is to those advantages that I now turn.

Before dealing with the fiduciary-specific landscape, it is perhaps worthwhile to place Bermuda in its geographical and political context. It is a commonly encountered misconception that Bermuda is in the Caribbean. It is in fact a group of more than 100 islands, the principal islands being linked by bridges and causeways resulting in a main island some 21 miles long and never more than two miles wide. It is in fact located in the North Atlantic Ocean some 665 miles off the coast of Cape Hatteras in North Carolina, United States. Bermuda has multiple flights each day to Eastern Seaboard hub airports (with customs and immigration pre-clearance in Bermuda). New York and Boston are less than two hours away and there is a daily direct flight to London in the summer and five times weekly in the winter. Bermuda is more than 1,000 miles from Miami and while an associate member of CARICOM (the association of Caribbean countries) it is geographically distinct.

On the international plane, Bermuda is an overseas territory of the United Kingdom of Great Britain and Northern Ireland. Bermuda is thought to have been first sighted in 1505 by the Spanish explorer, Juan De Bermudez (from whom it takes it modern name) on board the Spanish ship, La Garza. It first appeared on a Spanish map in 1509 but was not settled until the British ship, the Sea Venture, was wrecked on its reef during a hurricane 100 years later in 1609. The Sea Venture was en route to Jamestown, Virginia carrying the new Governor of Virginia and captained by Sir George Somers. Thereafter, Bermuda (sometimes known  as the Somers Isles) was formally claimed by the British Crown in 1612, English law was extended to Bermuda and the Supreme Court had its first recorded sitting in 1616. The law of Bermuda today remains, according to the Supreme Court Act of 1905, the law of England as it applied on 11 July 1612 (the formal date of settlement) as amended from time to time thereafter.

Not only is this historical digression of interest, but it also establishes a number of important points about Bermuda’s modern constitutional position as set out in its 1968 Constitution. The first is that the British Governor of Bermuda retains significant reserved powers over international relations, police and security and the assent to legislation passed by the Bermuda parliament. This parliament is the third oldest continuously sitting parliament in the world having first sat in 1620. The second point is that Bermuda law has the great benefit of applying principles of English law and equity. Many of Bermuda’s most important statutes are drawn from English precedents. This is true also in the sphere of trusts with Bermuda’s Trustee Act 1975 following closely the English equivalent of 1925. Third, Bermuda’s final court of appeal (the Supreme Court of Bermuda being the first instance court and the Bermuda Court of Appeal the intermediate appellate court) is the Privy Council in London. This provides to those who do business in Bermuda, or who have their wealth managed from Bermuda, a high degree of confidence as to the predictability of decision making in the Bermuda courts. Bermuda therefore represents a unique mix of cultures with a central pillar being its stability as a tax neutral domicile.

While Bermuda’s dominance in the insurance and reinsurance market 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 very 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 has the consequence that the banking sector and professional service firms, such as legal and accountancy firms, are expected to, and do, provide world-class service across their entire client base, including trustees and families. The captive insurance vehicle for which Bermuda is rightly renowned as the world’s leading captive domicile can, depending on the underlying corporate structure holding a family’s wealth, be considered.

Going hand in hand with this professional service culture is an experienced regulator in the form of the Bermuda Monetary Authority which is charged with the regulation of the licensed trustee sector. Bermuda has 28 licensed trust companies regulated by the Bermuda Monetary Authority under the terms of Trusts (Regulation of Trust Business) Act 2001. Private trust companies, however, are currently exempt from regulation by the Bermuda Monetary Authority under this legislation and their incorporation and management is governed by the provisions of the Companies Act 1981. Among Bermuda’s licensed trust companies there are a number of global players as well as high-quality Bermuda-specific firms. Family offices established in Bermuda can and do draw on the breadth of talent that the licensed trust company sector promotes.

Turning now to how and why Bermuda trust law is supportive of the family office sector, as noted above, it is based on English equitable principles and Bermuda’s 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 that aims to protect properly established and funded Bermuda law trusts from attack based on foreign inheritance, matrimonial or insolvency claims. This legislation (which dates from 1989 and was amended in 2004) is expected to be revised and modernised in 2018/19. In what remains a very 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 have proved to be enduringly popular for families or businesses wishing to develop a trust structure for a particular 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 a sufficient interest now have standing to make an application to the Supreme Court to enforce a Bermuda purpose trust. This change also resulted in Bermuda 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 piece of law reform coming into force on 16 July 2014, it was very 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.

In a further piece of clarificatory legislation, the Perpetuities and Accumulations Amendment Act 2015 made the process for perpetuating Bermuda law trusts much 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 a number of high-value trusts redomiciling to Bermuda to take advantage of the flexibility afforded to the Bermuda court to perpetuate trusts which were perhaps settled some time ago and which require restructuring. Prior to the passing of 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 save 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, something which is often of particular appeal 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 those trusts. The 2015 Amendment Act, which came into force on 1 August 2015, 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 court 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 in which Chief Justice Kawaley held that it could be 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 has been properly considered and presented to the court. The principles which Kawaley CJ set out in the C Trust case were:

• the court should not act as a ‘rubber stamp’;
• the court should have regard to the best interests of all interested parties, broadly defined and looked at as a whole;
• the fact that extending the duration of a trust will dilute the economic interests of existing beneficiaries 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 the case of 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 re-domiciled from Cayman to Bermuda. The factors which Kawaley CJ took into consideration in granting the application included that the family whose wealth was held in the G Trust genuinely looked upon wealth as dynastic in nature, 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. Quite apart from perpetuation, Bermuda’s Section 47 of the Trustee Act 1975 has been used successfully 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 can be particularly 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 Bermuda court may grant to a trustee the power to effect a transaction provided that the proposed transaction is ‘expedient’ which has been interpreted in the case-law to mean ‘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 court to confer upon a trustee a power to amend a trust including the beneficial interests held under the trust. In the leading case on this legislation, GH, IJ v KL & Ors [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 court 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 the G Trusts case in which the Chief Justice reaffirmed the practice of the Bermuda court of anonymising trust cases in non-contentious cases. Importantly, this decision came after 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 CJ 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 recent trend in Bermuda trust cases is that of trustees increasingly seeking the assistance of the court when taking what are referred to as ‘momentous decisions’. The jurisdiction of the court 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 only resulted in one or two reported cases over the previous decade. However, there have been several important recent cases concerning trusts of very significant value. One example was In the Matter of A Trust [2018] SC (Bda) 42 Civ in which 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 is ordinarily testing the trustees’ decision making against what a reasonable body of trustees would have decided and the court asks whether the trustees had taken into account 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. On the facts the court approved the trustees’ decision to enter into the transaction.

The case-law mentioned above is but a small sample of the range of interesting decisions in high-value trust cases that has emanated from the Supreme Court of Bermuda 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 mentioned in this article are helping to drive the trust business sector in Bermuda. Coupled with this, the Bermuda government has recently developed a FinTech strategy with the passing of several pieces of legislation aimed at encouraging business in this sector including the Digital Asset Business Act 2018.

These developments in Bermuda law 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.

An original version of this article was first published by The International Family Offices Journal, November 2018.

© Carey Olsen 2018.

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