Bermuda's trust industry continues to innovate to create bespoke structures in order to meet the demands of clients for increasingly novel trust solutions.
Recently, for example, I wrote about the increasing use of Reserved Power Trusts, which allow settlors to retain fairly extensive rights and powers, thereby enabling a settlor (or another party of his choosing) to exercise significant control over the way that the trust is administered, such as retaining the power to add and exclude beneficiaries, the power to remove trustees and appoint new ones, the power to vary or amend provisions of the trust deed and retaining investment powers over the trust assets.
Today, I will discuss two uses of the trust in a business context – Insurance Trusts, and Pensions and Employee Benefit Trusts – as well as the increasing popularity of the Islamic Trust. These are three examples of the flexible and unique nature of the trust, which due to the idiosyncrasies of the trust generally make it difficult for any other type of vehicle or structure to easily replicate the mechanics of it.
Bermuda has played a leading role in the development of Insurance Trusts by having major insurance companies sell life and annuity policies. Many of these policies are owned by Bermuda trusts created by the insurance companies in order to characterise them as investment products rather than as insurance.
A currently popular insurance structure involves a master trust/sub trust combination where an investor has his own sub-fund held in a sub-trust. The master trust acts as a funnel for the transfer of initial funds into the investor's sub-trust.
As the assets of each investor are held at sub-trust level, the sub-trust can be drafted so as to allow the investor a significant degree of control through the conferral of various powers, including the power to change beneficiaries and/or their interest allocations, the power to direct the trustee as to appointments of income and capital, or the power to terminate the sub-trust. This allows a greater level of flexibility as well as security for the investor.
In addition, trusts are being created by individuals to buy and hold individual or annuity policies. Such structures are being created for persons who are concerned about asset protection, political risk or forced heirship -- or for typical tax or investment reasons.
For example, Americans who buy insurance policies owned by trusts which are drafted to meet U.S. tax requirements are able to achieve considerable tax planning and asset protection benefits.
Trusts are also being used in the context of the remuneration or incentivisation of employees – for example, the Pension Trust.
Contributions towards employee pension plans, executive compensation, share benefit schemes and other profit sharing schemes can provide a flexible way for employers to attract quality staff and support and encourage adherence to company objectives.
Pensions and other employee benefits for multi-national companies may be covered by a single plan administered by a trustee in Bermuda. As with all trusts domiciled here, contributions and accumulations are tax free in Bermuda (although benefits may be taxable depending on where the employee is located at the time of payment).
The regulatory system in Bermuda also supports the creation of QROPS – Qualified Recognised Overseas Pension Schemes. QROPS, which have been approved by the United Kingdom tax authorities, facilitate the transfer of pension interests by expatriates that have left the U.K. indefinitely into an approved scheme in another jurisdiction. QROPS have proved attractive because they provide relief from U.K. inheritance tax, remove the need to purchase an annuity on retirement, and can provide greater investment flexibility.
We are also seeing increasing interest from clients in the Middle East in structures designed to ensure that family wealth remains available for the benefit of future generations. A trust structure is a useful vehicle for this purpose and, with the already long established use of the Islamic waqf, general trust principles are not an alien concept under Islamic law.
The Islamic waqf system is conceptually similar to the common law trust, with the idea being that someone gifts specific property to a third party to be held for the benefit of others. The flexibility of the trust allows adherence to Islamic law and the holding of property for the benefit of others, including for charities.
As with all complex matters of law, it is sensible to consult an expert in the area.
Article first published in The Royal Gazette, November 2012
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
