In evaluating various trust options, many people turn to offshore trusts for asset protection, tax planning, and diversification.
There are a handful of jurisdictions across the globe that provide offshore asset protection trusts, including Bermuda. Not all offshore trusts are created equal, however, and this article outlines the basics of Bermuda Trusts to help you determine whether a Bermuda Trust is right for your financial objectives.
What is a Bermuda Trust?
A Bermuda trust is a type of offshore trust established according to the laws of Bermuda. Located off the East Coast of the United States, Bermuda is under the jurisdiction of the UK government.
The government of Bermuda has forged business relationships with lawyers, accountants, and investment professionals across the globe. As a result, Bermuda became the first offshore jurisdiction to be whitelisted by the Organization for Economic Cooperation and Development (OECD). This distinction means Bermuda has demonstrated an adequate level of protection and abides by its international commitments.
The territory is known for having a stable financial center with a legal framework based on English common law and innovative legislation designed to serve the needs of discerning investors and wealth managers worldwide.
In short, a Bermuda Trust can be a useful asset protection solution for high-net-worth individuals and those with more modest portfolios interested in protecting what they’ve earned. Like most forms of trusts, a Bermuda trust works by allowing another party (known as the trustee) to hold the title to property and assets for the benefit of the grantor (also known as the settlor) and beneficiaries.
Types of Trusts That Can Be Created in Bermuda
People looking to establish a Bermuda Trust have a high degree of flexibility in choosing the type of trust they’d like. There are several options available, including the following:
A revocable trust is a type of living trust that allows you to manage the assets in the trust during your lifetime. In the event of your death, or incapacitation to the degree that you are unable to manage the assets in the trust, the trustee can take control and manage the trust according to your previously provided instructions. While revocable trusts are useful for estate planning purposes, they’re not typically used for asset protection.
Charitable trusts are helpful for philanthropic endeavors. This legal instrument is designed to benefit a cause or non-profit organization, as opposed to other types of trusts which are meant to advance the interests of individual beneficiaries.
Also referred to as non-charitable purpose trusts or private trusts, purpose trusts benefit a specific objective or purpose that is not for a charitable cause. Examples of purpose trusts include:
- Preserving a property
- Benefiting a neighborhood or community
- Performing medical research
- Supporting animal shelters or wildlife conservation efforts
- Providing scholarships for tuition, books, and associated educational expenses
- Maintaining a family pet
Fixed Interest Trust
With a fixed interest trust, the trust’s beneficiaries receive a predetermined distribution of assets based on a predetermined entitlement that typically remains fixed over time. Unlike other trusts which allow for discretionary distributions, a fixed interest trust requires a trustee to distribute income and assets according to the terms of the trust.
Taxation in Bermuda
Bermuda is considered a “tax-neutral” territory, which means the following taxes will not be applied:
- Income taxes
- Taxes on trust profits
- Corporate taxes
- Capital gains taxes
- Estate and inheritance taxes
Bermuda’s taxes consist primarily of payroll taxes, fuel taxes, property taxes, and customs and import duties.
This structure has been guaranteed by the Bermuda government to continue until at least 2035. Both the settlor and beneficiaries are generally free from any Bermuda’s income tax if they are non-residents.
However, there may still be taxes imposed by your home country that must be paid on income generated by the trust. Also, when the property held in the trust is outside of Bermuda (real estate, for example), it is subject to a nominal fee called a “stamp duty.” This fee is minimal and primarily symbolic in nature.
Benefits of Bermuda Trusts
Offshore trusts, particularly Bermuda Trusts, are becoming increasingly popular because of the territory’s favorable laws and the reputation the area has for being well-regulated financially.
Flexibility in Asset Types
You can place virtually any asset into a Bermuda Trust, including but not limited to:
- Real estate
- Financial instruments (stocks, bonds, mutual funds, and other securities)
- Intellectual property
- Personal property
- Life insurance policies
An added advantage is the asset does not have to be physically in Bermuda to receive protection. It’s worth noting that United States real estate may not be wholly protected in the event of a judgment.
One of the reasons Bermuda Trusts and offshore trusts are popular among the financially savvy is due to the level of asset protection afforded. Specifically, Bermuda Trusts can shield assets from creditor claims and lawsuits.
Assuming the trust is properly set up, Bermuda will not recognize a judgment from a foreign government. As a result, if a creditor or plaintiff attempts to lay claim to your assets, Bermuda laws will not release any funds from your trust.
There may be exceptions; however, the logistical and financial difficulties are often so burdensome that assets in the trust are adequately fortified.
Estate and Succession Planning
Trusts are a practical estate and succession planning instrument, and Bermuda Trusts are no exception. One can utilize a Bermuda Trust to create specific instructions for how assets will be managed and distributed to beneficiaries into perpetuity (including the settlor).
It’s not uncommon for those interested in protecting their wealth to also be concerned about privacy. A Bermuda Trust is subject to limited disclosure, and some trusts include nondisclosure clauses to further restrict the sharing of information.
In addition to the privacy protections inherent in an offshore trust, Bermuda has laws that make it burdensome for foreign individuals and entities to access information about a trust, even when they take aggressive legal action.
Are there any risks associated with Bermuda Trusts?
Despite the advantages offered by a Bermuda Trust, this financial instrument is not without risk. At Blake Harris Law, we advise clients to consider the following risks:
- Changing legal and regulatory landscape: It’s been noted the current tax laws in Bermuda are valid through at least 2035; however, there are no guarantees about how trusts will be taxed after that time.
- Beneficiary disputes: A Bermuda Trust is not shielded from disputes among beneficiaries. These disputes can arise from disagreements about trust distributions, trustee actions, accounting discrepancies, and more. Drafting a detailed and unambiguous trust document, along with appointing a professional trustee, can help mitigate these risks.
- Tax and international agreements: It is possible that pressure from international organizations, including those in the U.S., may influence change in the laws. Territories in UK jurisdictions, which includes Bermuda, are being pressured by public policy initiatives to be more transparent and cooperative in legal proceedings. If these initiatives take hold, it could erode the significant asset protection advantage of a Bermuda Trust.
An alternative to a Bermuda trust is a Cook Islands Trust. While similar to a Bermuda trust, a Cook Islands Trust is governed by the laws of the Cook Islands.
Cook Islands Trusts have more robust asset security features than Bermuda Trusts, and have a shorter statute of limitations for fraudulent transfer claims. In comparison, a Cook Islands Trust may be a better choice for those less worried about regulation.
Bermuda Trust Transparency Regarding Reporting and Privacy Consideration
The Bermuda government claims to be a leader in transparency and reporting compliance. Its policies state any “legitimate tax authority” can obtain information. This also includes the UK’s National Crime Agency, which is committed to battling money laundering activities and other types of financial crimes.
This high level of transparency is fairly balanced with privacy considerations. Primarily, trust documents drafted in Bermuda will contain confidentiality and nondisclosure clauses. There is also the option to keep the identities of beneficiaries hidden from the public.
Costs Associated with Bermuda Trusts
Several upfront costs and ongoing fees are associated with a Bermuda Trust. These include:
- Legal fees for drafting trust documents
- Trustee fees
- Registration and filing fees
- Advisor fees
- Asset management
- Compliance costs
- Ongoing legal advice
- Advisor fees
The specific fees will vary, depending on several factors. For example, the complexity of the trust, the portfolio of assets, and the level of administrative services required can all influence the cost of a Bermuda Trust.
Contact an Experienced Bermuda Trust Attorney
Offshore trusts, including Bermuda Trusts, serve a diverse group of individuals with varying asset protection and wealth management goals. To determine whether a Bermuda Trust or another offshore trust is most appropriate for your asset protection goals, contact Blake Harris Law today.