Private trust companies may be described as companies established to act as trustees for one or more trusts that are related in some way (eg, made in connection with the same family group, philanthropic or charitable organisation, business or investment fund).
Bermuda has a stellar international reputation and is a popular jurisdiction in which to establish private trust companies, trusts and underlying entities (including private funds and insurance vehicles) and family offices (or branches thereof). Part of Bermuda's international appeal includes:
- its political stability, safety and quality of schools, hotels, conference centres, restaurants and infrastructure;
- its high-quality legal system – a common law system based on, but independent from, that of England and Wales (Bermuda's final court of appeal is the Privy Council in London);
- its pragmatic and respected regulatory environment;
- the direct flights to and from New York, London, Toronto, Miami and other major centres (when travelling to the United States, travellers clear US customs and immigration in Bermuda);
- the presence of international law firms and the ability of such firms to, where appropriate, employ talented lawyers from outside the jurisdiction and in appropriate cases, arrange for senior barristers (eg, Queen's counsel from the United Kingdom and other jurisdictions) to be granted rights of audience before the Bermuda courts;
- the presence of the 'big four' and other international accountancy firms as well as international trustee and corporate service providers; and
- its political stability, safety and quality of schools, hotels, conference centres, restaurants and infrastructure.
For the purposes of this article, except where the context otherwise requires, references to private trust companies will be to companies acting as trustees in or from Bermuda which are exempt from Bermuda's trustee licensing requirements.
The selection of trustees is an important consideration, particularly for families who are considering establishing trusts outside the jurisdiction with which they are most closely connected. Many licensed trustees and corporate service providers offer the advantages of:
- greater independence;
- a respected international reputation in financial services; and
- the availability of directors and personnel who are experienced in providing trust and corporate administration services under the laws and regulations of the jurisdictions in which they operate.
However, where circumstances permit, high-net-worth families may wish to consider establishing a private trust company to act as the trustee of trusts in order to maintain greater influence over the information and administration in respect of the trust structure. Use of a private trust company does not preclude the engagement of licensed service providers to assist with certain aspects of administration of the private trust company and the trust structure. The involvement of Bermuda-licensed service providers may materially reduce the compliance obligations that would otherwise be directly imposed on private trust companies. However, private trust companies provide families with control over the extent to which licensed service providers are involved in the administration of the trust structure.
The advantages of private trust companies established under Bermuda law are numerous and include as follows.
Control Private trust companies allow the settlor and the settlor's family to retain greater control over the trustee decision-making processes, including in respect of:
- investment selection;
- the management of underlying companies (whether operating or investment vehicles); and
- the appointment of delegates, including licensed service providers.
Family involvement Family members and their trusted advisers may be appointed directors of the private trust company. This can facilitate:
- family members working together in a structured environment; and
- the development of younger family members' decision-making capabilities and knowledge in respect of:
- financial services;
- investment; and
- familial affairs.
Flexibility of investment selection Families may wish to have trust funds invested in alternative or high-risk investments. A more risk averse licensed or individual trustee may be less inclined to make such investments, whereas private trust companies are generally in a better position to do so – primarily because they ordinarily do not have the same risk profile and regulatory and other pressures as licensed trustees. Individuals acting as trustees may become preoccupied with the risk of being sued personally should the investments diminish in value.
Minimising trustee and government fees Private trust companies allow families to minimise fees (including ad valorem fees based on the value of the trust fund) that may be charged by a licensed trustee. Bermuda private trust companies do not incur the government charges that are imposed on Bermuda-licensed trustees; instead, they incur only the relatively modest government fees (eg, on incorporation and annually) that are generally imposed on Bermuda companies.
No minimum capital and insurance requirements Bermuda private trust companies are not subject to a minimum capital requirement and neither the private trust company nor its directors need to obtain insurance in connection with the performance of their functions. Of course, private trust companies and their directors and officers can arrange insurance as they consider appropriate and, subject to the trust's terms, the premiums may be discharged from the applicable trust funds.
Continuity Licensed corporate trustees may experience a turnover in staff and even undergo changes in ownership. This may result in a change in the nature and level of service and a loss of knowledge of the licensed trustee in respect of the family and the trust structure. These issues arise considerably less frequently with private trust companies.
In addition, private trust companies allow families largely (and often completely) to avoid disputes (and consequent inconvenience and costs) which can arise when replacing licensed corporate trustees or individual trustees and transferring trust property from outgoing trustees to incoming trustees. With a private trust company, it is possible to simply change its directors without needing to replace the trustee itself and thereby avoid the transfer of trust property to new or continuing trustees.
Preferable to individual trustees Aside from other issues outlined herein in respect of individual trustees, appointing individuals as trustees can also result in a number of other succession and administrative issues. For example, an individual trustee may die or lose mental capacity, which can result in delays and costs while arrangements are made to appoint a successor.
Minimise liability Directors, officers and members of a private trust company benefit from the corporate veil. In the absence of dishonesty or personally assuming obligations to beneficiaries or third parties, it is ordinarily difficult for a private trust company's director, officer or member to be liable for a breach of trust or contract claim made in respect of a breach by the private trust company as trustee. Concerns about possible personal liability on the part of private trust company directors may be addressed through exoneration and indemnification provisions in the private trust companies constitutional documents and in the applicable trust deed or by appropriate director and officer insurance.
Greater privacy Trustees often may receive, and be required to consider, personal and confidential information as part of their decision-making processes. Use of a private trust company can minimise the amount of personal information that families must share with third-party service providers.
Notably, under Bermuda law trust documents, internal correspondence and records are not available for public inspection or generally to third parties. Only certain records of Bermuda companies (including private trust companies) are available for public inspection. These are outlined later in this article.
Timely formation Most Bermuda private trust companies for international families are incorporated within five to 10 business days of submission to the Bermuda Monetary Authority (BMA) of the application for approval, provided that they are accompanied by all of the information required by the BMA.
Private trust companies are ordinarily established under Bermuda's Companies Act as companies limited by shares or, less frequently, limited by guarantee. A private trust company may use the word 'trust' or 'trustee' in its name, notwithstanding that it is not a licensed trustee.
Companies limited by shares must have at least one member. Shares of no-par value and bearer shares are prohibited. The liability of the member is limited to the paid-up value of the shares.
Bermuda law distinguishes between local, exempted and overseas companies. Most Bermuda private trust companies established in respect of international families are incorporated as exempted companies (ie, companies that are exempted from the requirements of having local or Bermudian ownership and as such are typically incorporated by non-Bermudians (eg, international businesses and families) and carry on business or activities outside of Bermuda).
Each Bermuda-exempted company must have at least one director and a secretary. None of the company's directors or other officers must be resident in Bermuda. If none of the company's directors or officers are ordinarily resident in Bermuda, the company must appoint an individual or company that is ordinarily resident in Bermuda as its resident representative.
In respect of exempted companies, Bermuda law permits the appointment of:
- corporate directors and secretaries;
- alternative directors to act in place of an absent director; or
- nominee members.
The following documents of Bermuda companies are available for public inspection:
- memorandums of association;
- certificates of incorporation;
- notices of a company's registered address;
- registers of directors and officers;
- registers of members; and
- registers of charges.
Notably, companies' bye-laws are not available for public inspection and, provided that they do not carry on activity that is regulated in Bermuda, exempted companies need not file accounts with Bermuda's regulators. Further, with certain exceptions, companies must now maintain a register of beneficial owners and file this information with the BMA. This register is not available for public inspection.
Bermuda companies must keep basic corporate accounts at their Bermuda registered offices. These accounts need not be filed with Bermuda's regulators, but they must be available to all of the company's directors. Private trust companies generally have few assets and, consequently, the accounts may be in a simple format.
Any person who provides the services as trustee of a business, trade, profession or vocation in or from Bermuda must be licensed under The Trusts (Regulation of Trust Business) Act 2001 unless exempted from the requirement.
The Trusts (Regulation of Trust Business) Exemption Order 2002 provides that a trust company is exempted from the trustee licence requirement if it is authorised to provide the services of trustee to the trusts specified:
- in its memorandum of association;
- in the case of an overseas company, its permit; and
- to other minister of finance-approved trusts.
Choosing a private trust company's board of directors is a key issue. The settlor may wish to be involved in determining the composition of the board of directors and may wish to be a member of the board so that they can participate actively in the private trust company's decisions relating to the underlying trusts and their assets. The selection of directors will be based on knowledge and experience, although it will likely be influenced by tax considerations and privacy protection.
The shares in a private trust company can be owned in a number of different ways, depending on tax and other planning considerations relevant to the family's circumstances.
While it is possible for an individual (eg, the settlor, a member of the settlor's family or their nominee) to be the member or shareholder of a private trust company, such an arrangement can give rise to concerns on the individual's death. One concern is practical and relates to probate requirements in respect of the individual ownership of the private trust company's shares. The second concern relates to succession and the suitability of those person(s) to whom the private trust company shares devolve on the individual's death.
In view of the problems associated with ownership by an individual, a private trust company is usually an orphaned structure so that its ownership is unattributable to any particular person.
Private trust companies have fewer regulatory obligations than licensed trustees. However, a private trust company must register with the BMA under Bermuda's proceeds of crime legislation as a non-licensed anti-money laundering/anti-terrorist financing (AML/ATF) regulated financial institution if it does not:
- use the services of a Bermuda-licensed corporate service provider; or
- have in its corporate structure, or engage the services of, a Bermuda-licensed trustee.
Most Bermuda private trust companies are owned by a licensed trustee in its capacity as trustee of a non-charitable purpose trust and consequently may not need to be registered as AML/ATF regulated financial institutions. It would therefore not be subject to regulatory obligations that flow from that (eg, compliance manuals and the appointment of a compliance officer and money laundering reporting officer).
The increase of international reporting and other obligations are resulting in more information being filed with regulatory authorities and in some instances shared with regulatory authorities of other designated jurisdictions (eg, in connection with international initiatives such as the Common Reporting Standard, Foreign Account Tax Compliance Act, beneficial ownership registers and economic substance requirements). This phenomenon of increased transparency and reporting is not only occurring in Bermuda but in most jurisdictions. Notably, under Bermuda law the information reported is not available for public inspection.
Settlor involvement can be achieved in several different ways and, depending on tax and other planning considerations, usually takes one or more of the following forms:
- as protector of and the person vested with reserved powers under the terms of underlying trusts of which the private trust company is trustee;
- as a member of the board of directors of the private trust company;
- as a member of an investment committee or council established to consult with the private trust company's board of directors regarding certain significant decisions affecting the underlying trusts, such as investment policy or the sale of family businesses; or
- as protector or enforcer of the trust which holds the shares in the private trust company.
The settlor could also own the shares in the private trust company but this may have undesirable consequences as outlined above.
Bermuda imposes no income or profit tax, withholding tax, capital gains tax, capital transfer tax or inheritance tax on Bermuda-exempted companies or their members.
Bermuda is an excellent jurisdiction in which to establish a private trust company, trust, family office and related entities.
These companies offer:
- a flexible way to arrange bespoke trustee services; and
- a convenient platform from which family members can meaningfully participate the management of underlying assets.
Particular care must be taken with regard to the private trust company's initial structuring. It is critical that the rights, powers and responsibilities vested in particular parties are fully understood (particularly by the settlor both during their lifetime and in future).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.