Vanessa Lovell Schrum and Ashley Fife examine the impact of the recent trust and charities act amendments on the Bermuda financial sector.
Important legislative changes are having a positive impact on Bermuda’s trust sector.Reserved Power Trusts: Amendment to the Trusts (Special Provisions) Act 1989 (1989 Act)
The Trusts (Special Provisions) Amendment Act 2014 (TSPA Act) provides that the settlor of a Bermuda law trust’s reservation or grant to other persons of any limited beneficial interests and/or any of the powers listed in the TSPA Act (Listed Powers) shall not invalidate the trust.
The Listed Powers include the following:
(in the case of a settlor) a power to wholly or partly revoke the trust;
a power to vary the terms of a trust or the trusts, purposes or powers in whole or part;
a power to give directions to distribute trust property;
a power to act as, or give directions regarding the appointment or removal of directors or officers of underlying companies, or to direct the trustees how to exercise shareholder voting rights relating to such companies;
a power to give directions in connection with investments or exercise rights arising from trust property;
a power to appoint, add, remove any trustee, protector, enforcer or other office holder or advisor;
a power to add, remove or exclude any beneficiaries or purpose;
a power to change the governing law and forum for administration of the trust; and
a power to restrict exercise of any powers, discretions or functions of a trustee by requiring they shall only be exercisable with the consent or direction of a specified person.
The TSPA Act absolves a trustee who has acted or refrained from acting in compliance with a valid exercise of any of the Listed Powers from any liability for breach of trust or duty.
If a trustee is prevented from acting in accordance with the Listed Powers due to applicable law or insufficient powers relating to the trust property, the TSPA Act provides the trustee shall not by that reason alone commit a breach of trust or duty.
The TSPA Act provides that the grant or reservation of the Listed Powers do not make the power holder a trustee unless formally appointed as such. The TSPA Act is unique providing, in the absence of contrary provision in a trust created after the commencement of the TSPA Act, all powers granted (or reserved) are presumed to be personal and non-fiduciary in nature unless the power holder is sole trustee.
Another unique feature is where a person (who is not sole trustee) has a general power of appointment, revocation, or a present beneficial interest in all or part of the trust property, the trust instrument may provide the trustee only owes duties to that person. This may be useful where it is desirable to restrict disclosure of information.
The TSPA Act is welcome news to settlors and trustees.
Statutory Hastings Bass: Amendments to the Trustee Act 1975
The Trustee Amendment Act 2014 (TAA Act) applies retrospectively to clarify the Court’s discretion to set aside a fiduciary’s flawed exercise of a power. The TAA Act preserves the rule in Hastings Bass as applied prior to the UK Supreme Court’s decisions in Pitt v Holt and Futter v Futter.
Under the TAA Act, the Court may upon being satisfied that certain conditions have been met, wholly or partly set aside the exercise of a fiduciary power, unconditionally or on terms it thinks fit.
The conditions are that:
a) the fiduciary did not take into account considerations relevant to the exercise of the power, or took into account considerations (whether of fact and/or law) that were irrelevant; and
b) but for the failure to take into account relevant considerations, or having taken account of irrelevant considerations, the fiduciary would:
(i) not have exercised the power;
(ii) have exercised the power but on a different occasion; or
(iii) have exercised the power but in a different manner.
The conditions may be satisfied without an allegation or proof that the fiduciary acted in breach of trust or duty.
The Court application to set aside the exercise of a fiduciary power may be made by:
the trustee or beneficiary where the power is conferred in respect of a trust, or for a purpose trust, a person expressly permitted under the trust instrument to bring such application or a person with sufficient interest in the trust;
where the power is conferred in respect of a charitable trust or for a charitable purpose, the Attorney-General; and
with the leave of the Court, any other person.
The rule in Re Hastings Bass had been construed as providing the Court power to declare a fiduciary’s exercise of power void if:
the effect of the exercise was different from what the fiduciary intended; and
it is clear the fiduciary would not have acted as it did had it taken into account relevant considerations or refrained from taking into account irrelevant considerations.
The rule in Re Hastings Bass had been used by fiduciaries to set aside flawed exercise of powers where the exercise had unforeseen adverse tax or other consequences.
However, in May 2013, in the cases of Pitt v Holt and Futter v Futter, the UK Supreme Court determined that a fiduciary’s exercise of a power was not void if it was within the scope of the power, but that it may be voidable if, on a beneficiary’s application, it was determined the fiduciary breached its duty to take into account relevant considerations.
Consequently, following these decisions, fiduciaries could no longer successfully apply to have decisions set aside where they had acted within their powers and followed professional advice, notwithstanding that the advice was incorrect.
Consequently, without statutory intervention, setting aside a fiduciary’s exercise of a power would likely be more time consuming and expensive with uncertain outcomes. Further, fiduciaries may have found themselves more exposed to claims for breach of duty (and advisers for negligent advice) from beneficiaries when, previously, a fiduciary may have applied to Court and had prospects of having the flawed exercise of power set aside. The TAA Act is welcome news to settlors, trustees and beneficiaries of Bermuda trusts.
Charities Act 2014
Bermuda’s Charities Act 2014 (Charities Act), operative on 31 December 2014, repeals and replaces the Charities Act 1978 with substantial amendment. It is based largely on the UK Charities Act 2011 and complements Bermuda’s well regarded legal framework for the establishment of local and international charities.
The Charities Act clarifies the definition of ‘charity’, gives the Registrar General (Registrar) and Charity Commissioners greater regulatory authority, and strengthens reporting requirements for registered charities.
All entities established in Bermuda for exclusively charitable purposes and for the public benefit must comply with the Charities Act.
The Charities Act defines ‘charitable purpose’ to include any of the following provided it is for the public benefit:
prevention or relief of poverty
advancement of: education, religion, health or the saving of lives, citizenship or community development, arts, culture, heritage or science, sport, human rights, conflict resolution or reconciliation (or the promotion of religious or racial harmony or equality and diversity) environmental protection or improvement, animal welfare;
relief of those in need due to disadvantage;
promotion of the efficiency of the Crown’s armed forces, police, fire, rescue or ambulance services; and
provision of recreational facilities.
The functions of the Registrar include: determining whether an entity is charitable; encouraging better administration of charities; investigating mismanagement of charities and taking appropriate action; and maintaining a Charities register.
The Charities Act permits the Registrar to take remedial or protective action where there is evidence of misconduct or mismanagement in the charity’s administration, or can suspend or cancel the charity’s registration. The charity may appeal decisions and/or submit a new application for registration.
Further, the Registrar has enhanced powers to gather information and launch investigations into registered charities, but must have a reasonable suspicion that an exempted charity is engaged in illegal activities before investigating it.
The Charities Act requires every Bermuda charity to be registered unless it is:
(1) Exempt by regulations; or
(2) Privately funded and does not solicit funds from the Bermuda public or receive funding from the Bermuda Government or Bermuda public sources; and (a) in the case of a trust, has a licensed trustee or private trust company as trustee or (b) has a registered office with and is subject to compliance by a Bermuda regulated institution.
Registration may be indefinite or for a definite period of time. The Charities Act allows for temporary licenses to solicit and collect donations in limited circumstances.
Charities must notify the Registrar of changes to its registered details, the charity’s trusts or where the charity ceases to exist.
All registered charities must submit to the Registrar annual statements of accounts and annual reports on the activities of the charity, which are open to public inspection.
The Charities Act sets out several offences, including supplying the Registrar misleading information and failing to keep, preserve or submit accounts.
The Charities Act includes a new requirement that all charitable trusts have an express dissolution clause providing that the trust assets be applied for the purposes of the charity on the trust’s termination.
Charitable status must be disclosed in publications.
It is an offence for anyone other than a registered charity to undertake public fundraising apart from solicitations within a religious or school premises, or as approved by the Registrar.
The Charities Act further improves Bermuda’s legal framework for charities and will benefit individual and corporate donors, and Bermuda’s charity sector.
Bermuda uniquely has adopted Model 2 Intergovernmental Agreements with the UK and US respectively in connection with FATCA, which provides for reporting directly to the IRS or HMRC as the case may be and thereby does not require disclosure to the Bermuda Government. It is anticipated the Bermuda Government will shortly release guidance material.
The International Cooperation (Tax Information Exchange Agreements) Act 2013 provides that Bermuda’s financial secretary is required to make a Court application for a production order and such proceedings will be heard in private thereby reducing pre-court exchanges which may increase the risk of inadvertent beaches of confidentiality agreements.
Bermuda continues to benefit from an efficient funds regime for closed ended, private funds and, following the Investment Funds Amendment Act 2013, Class A and B Exempt Funds, which can generally be registered via an online system known as ERICA in a matter of days.
It is very much a case of watch-this-space as Bermuda has a number of trust and other financial sector reforms planned for 2015.
Ashley Fife TEP is counsel in the trusts and private wealth team of Carey Olsen Bermuda Limited. He provides advice in relation to private and commercial trusts and their underlying entities - including partnerships, companies and limited liability companies. Ashley advises in respect of the formation of family offices and regulatory issues impacting upon trustees, corporate service providers, trusts and underlying entities e.g. FATCA and CRS, beneficial ownership registers, anti-money laundering/terrorist financing and economic substance requirements.
Vanessa Lovell Schrum
Vanessa is a partner and Bermuda Head of Appleby’s Private Client and Trusts practice group. She has extensive experience on a wide range of trust and estate planning matters, advising on the use of Bermuda private and commercial trust structures (including purpose trusts and unit trusts), the administration of complex and large estates, and all areas of probate and equity matters in Bermuda, including applications to the Supreme Court of Bermuda.
Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, Mauritius, Seychelles and Shanghai.