Bermuda: Another Option For Private Trust Companies Following The Companies Amendment Act

Bermuda continues to be a popular jurisdiction for the formation of Private Trust Companies (PTCs) where assets are significant. They are particularly attractive for clients who do not wish to use an institutional trust company and also continue to be a vehicle of choice for those wishing to establish a family office and for clients from civil law countries, among others.

A PTC is a company with trustee powers that 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 be carrying 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.

Until recently, a PTC could only be established as an ordinary Bermuda local or exempted company. The Companies Amendment Act 2006 (the "Amendment Act") introduced a second option on 29 December 2006. A PTC can now be formed as a company limited by guarantee (a "Guarantee Company"). This is a company that does not have shareholders in the traditional sense but is instead ‘owned’ by its members who in turn guarantee to settle any debts and liabilities up to a predetermined amount if the company becomes insolvent. A Guarantee Company is managed by its own board of directors. This has advantages where the sponsor of the PTC does not want to be connected with the ownership and set up of the company, perhaps for "onshore" tax or control reasons.

Unlike a public trust company where the minimum capital requirement is US$250,000, there is now no minimum capital for a PTC. This is due to the Amendment Act, which repealed the former requirement for a PTC formed by way of ordinary company incorporation to have a minimum share capital of US$12,000. However in practice most PTCs will continue to be capitalised with sufficient funds to meet anticipated start up and running costs.

Where the PTC is structured as an ordinary local or exempted company, care needs to be exercised in retaining ownership and/or control over it, since doing otherwise could produce adverse tax and other consequences. For this reason it is not uncommon to have the PTC ‘orphaned’ by having it owned by a Bermuda purpose trust or by having it formed as a Guarantee Company with no shareholders.

A Bermuda PTC has several advantages that are making them increasingly popular. They include:

• Cost: There is no expensive licensing process for a PTC in Bermuda as in other jurisdictions, and they are relatively cost effective to set up and administer.

• Familiarity: Families from jurisdictions that are unfamiliar with the trust concept often appreciate and better understand the PTC concept. These can be compared to structures that are familiar to them, such as a corporate or foundation structure.

• Comfort: Often people are more comfortable having significant assets administered by a PTC that they have created and possibly own or control by way of representation on the board.

• Privacy and Confidentiality: A PTC affords privacy and confidentiality about the family’s assets and their activities.

• Efficiency: The absence of licensing makes it quicker, easier and less expensive 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 a PTC often 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 the institutional trustee making decisions regarding the trust assets, the use of a PTC structure enables family members or trusted advisers to be involved in the decision making process by becoming directors or consultants to the PTC.

• Trust Investments/Risk: An institutional or professional trustee will always prefer to hold a diversified portfolio of low risk investments. The PTC does not have similar constraints.

• Decreased Risk of Litigation: A PTC can be attractive to institutional trustees who are concerned about the increased risk of litigation focusing on trustees’ actions. Often the institutional trustee can earn similar fees by providing ‘trustee like services’ under a service agreement, and avoid the fiduciary obligations/liabilities imposed on trustees.

Bermuda continues to be a popular jurisdiction for the formation of Private Trust Companies (PTCs) where assets are significant. They are particularly attractive for clients who do not wish to use an institutional trust company and also continue to be a vehicle of choice for those wishing to establish a family office and for clients from civil law countries, among others.

The Amendment Act introduced various other changes that have an impact on the formation and administration of a PTC. Among these changes, company documents may now be delivered electronically and a PTC may act, in lieu of a meeting of members, through resolutions in writing signed by the same majority as would be required at a meeting. The requirement for a PTC to have a common seal has been repealed. In addition a PTC may now apply to register a secondary name in a foreign language and non-Roman script (such as Chinese and Asian characters), in addition to its primary name.

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.