By Accident or Design: Bermuda’s Unique Variation Provision

Bermuda’s legal system has its roots in English common law, having adopted the doctrines of equity and English statute law in force in 1622. Much of Bermuda’s current legislation is based on English equivalents. However, from time to time, there are differences between English and Bermuda legislation that create unique opportunities.

In England and jurisdictions that base their trust laws on those of England (other than Bermuda) there are two options for statutory variation of a trust:

1.  Full-scale variation under the local equivalent of the English Variation of Trusts Act 1958, which

a.  can vary beneficial interests as well as administrative terms, and

b.  requires: (i) consent from all adult beneficiaries; and (ii) that the variation be for the benefit for unascertained, minor and unborn beneficiaries.

2.  Variation of management and administrative provisions under the local equivalent of s.57 of the English Trustee Act 1925,

a.  which is easier to obtain since the test is expediency (i.e. in the interests of the trust as a whole) and consents from all adult beneficiaries are not required;

b.  but beneficial interests cannot be varied, except to the extent they are incidental to the administrative change sought.

In Bermuda the full-scale variation is available as summarised above. However, for the second option (the local equivalent of s.57 of the English Trustee Act 1925), Bermuda’s s.47 Trustee Act 1975 permits the Bermuda Court to:

•  vary beneficial provisions of a trust without obtaining the consent of all the adult beneficiaries; and

•  where it is ‘expedient’ to do so the court is not required to determine that the variation is in the interests of incapable beneficiaries whose interests may well be affected by the variation.

In the words of Kawaley C.J.:

“[Section 47] gives the Court very broad jurisdiction indeed to authorise transactions in relation to trust property which have the effect of varying the terms [of] a trust deed. This power is actually broader than that conferred by the provisions of section 48 which explicitly deal with variation alone.”  

As will be discussed below, this unique power can be very advantageous in certain circumstances.

Bermuda’s Unique Legislation

By accident or design, s.47 combines the best elements of two English law sections. It adopts the term ‘transaction’ (and its definition) from the Settled Lands Act 1925, deletes reference to ‘in the management or administration’ and retains the threshold of ‘expediency’ from the English Trustee Act. 

Section 47 of the Bermuda Act:

Power of court to authorise transactions relating to trust property

47. (1)  Where any transaction affecting or concerning any property vested in trustees, is in the opinion of the court expedient, but at the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by any provision of law, the court may by order confer  upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms and subject to such provisions and conditions, if any, as the court may think fit and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income.

(2) The court may, from time to time, rescind or vary any order made under this section or may make any new or further order.

(3) An application to the court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.

(4) In this section, “transaction” includes any sale, exchange, assurance, grant, lease, partition, surrender, reconveyance, release, reservation, or other disposition, and any purchase or other acquisition, and any covenant, contract, or option, and any investment or application of capital, and any compromise or other dealing, or arrangement.

The Bermuda Courts

The legislative foundation had been laid. All that was required was a favourable judicial interpretation of the legislation. The Bermuda Courts assisted with an expansive interpretation of the unique wording of Section 47.

The Thin Edge of the Wedge

The first known case was an unreported decision in January 2005. The Court confirmed that the definition of ‘transactions’ in s.47 was wide enough to enable the Court to confer on the trustees the power to vary provisions of the trusts. The court reasoned that allowing variation of the trusts would avoid a circular set of steps or transactions where the same result could be obtained directly by one step or modification. If under s.47 the Court could confer the power on the trustee to transfer the trust fund on to new trusts, then it followed that the court could allow the amendment to be made to the existing trust and avoid the requirement for the transfer to a new trust. In some circumstances this will be advantageous to the parties as the transfer to a new trust might trigger a taxable transfer or taxable event.

Since this was an unreported decision, the trust industry has not yet taken full advantage of s.47.

Foot in the Door: GHIJ v KL & Ors [2011] SC (Bda) 23

The first reported case was GH v KL where the trustees brought proceedings to vary a will trust under s.47.  Using the logic of the earlier unreported decision, the trustees requested the power to vary, i.e. the power to execute a Deed of Declaration declaring that they would continue to hold the estate on the will trusts with certain variations to beneficial entitlements.

In a short judgment, Ground C.J. held that:

•  The elimination of the words “in the administration or management” of trust assets from s.47 of the Bermuda Act must have been deliberate on the part of the legislature.

•  The alternative words – “transaction affecting or concerning” the trust assets  were derived from s.64 of the English Settled Land Act 1925.

•  It was appropriate to consider English authorities decided under s.64 of the Settled Land Act 1925.

• The courts should adopt the reasoning of Morritt J. in Hambro v Duke of Marlborough [1994] Ch 158:

“Thus, all the cases show that transactions approved under section 64 [of the Settled Lands Act 1925] may vary the beneficial interests of those who cannot consent to the proposal because they are not of full age or capacity or because they are unborn or unascertained. But there is nothing in section 64 to limit the jurisdiction to the  interests  of  such  beneficiaries  to  the  exclusion  of  those  who  are ascertained and of full age and capacity.”

•  The variation was within the definition of ‘transaction’, as defined by s.47(4).

•  The trustees’ proposals were expedient.

•  A variation that results in tax efficiency will not prevent the applicaiton of section s.47.

The Flood Gate Opens: Re ABC Trusts [2012] SC (Bda) 65 Civ

Chief Justice Kawaley replaced Sir Richard Ground in April 2012. The new Chief Justice continued to build on the ground work of the former Chief Justice – he confirmed that the court’s power to, in effect, vary a trust under s.47 was in fact “wider than that conferred by the provisions of section 48 which explicitly deal with variation alone”.

The court made orders to approve transactions to vary under s.47 to:

•  extend the trust’s perpetuity period so as not to, for example, deprive future generations of the benefit of the trusts, potentially adversely impacting comparatively young beneficiaries should they come into substantial sums of money at a young age;

•  include modern trustee charging provisions; and

•  to remove the requirement to consider the law of Prince Edward Island when determining whether or not a particular object is charitable

Section 47 is now regularly used in Bermuda to vary dispositive as well as administrative powers in increasingly ambitious ways.

Why is s.47 of the Bermuda legislation so useful?

As mentioned above, on an application under s.47 the Bermuda courts:

•  can vary both beneficial and administrative provisions of a trust;

•  are not obliged to obtain the consent of all of the adult beneficiaries;

•  determine that the test is whether the transaction/variation is ‘expedient’, which has been construed to mean that the transaction/variation must benefit the trust as a whole rather than just some of the beneficiaries, for example providing for more efficient administration of the trust, or reducing the incidence of tax; and

•  determine that there is no requirement to demonstrate that all beneficiaries (including unborn children, etc.) benefit in the same way or to the same extent, or that it is in the interests of incapable beneficiaries whose interests may well be affected by the variation.

To demonstrate how s.47 can produce a better result than the full-scale variation, consider a trustee of a US-style trust  with no, or limited, overriding powers of appointment or advancement. The trustee is faced with the following facts:

•  Accumulated income.

•  Some US beneficiaries are exposed to US throwback tax/accumulation distribution rules resulting in complete elimination of their interests.

•  US advisers advocate restructuring to improve US beneficiaries’ position by severing their interests from non-US beneficiaries and changing the beneficial interests.

•  US advisers do not want their beneficiaries consenting and ideally would like to convert their fixed interests into discretionary interests.

•  Trust jurisdictions, common law jurisdictions – almost everywhere other than Bermuda, require a full-scale variation, but could not be performed without the consent of the US beneficiaries

•  In Bermuda a s.47 would be possible to produce a tax-efficient variation without the consent of the US beneficiaries

Other Examples

Situations where s.47 can assist:

•  in cases where some of the beneficiaries refuse to consent or are advised not to do so for tax reasons;

•  where it is difficult to demonstrate a benefit for unascertained, minor and unborn beneficiaries;

•  for FATCA/CRS reporting or tax reasons it is advantageous to turn fixed trusts of income into discretionary interests;

•  for family dynamics or tax reasons – partitioning a trust into separate settlements each of which would contain a wide power of advancement allowing individual restructuring; 

•  to vary the beneficial interests of the trust;

•  to extend the perpetuity period of the trust;

•  to ratify decisions made by (de-facto) trustees when their appointment or retirement is defective;

•  it can vary investment powers;

•  it can add powers to appoint trustees; 

•  to modernize provisions deemed expedient for the trust, e.g. trustee charging powers;  and

•  when adding a charity as a Substantive Beneficiary

Migrating Trusts to Bermuda

Where Bermuda law does not govern the trust, it is becoming increasingly common for non-Bermuda trusts to migrate to Bermuda to utilize s.47.  The typical steps to migrate involve:

(i)  the appointment  of  new  replacement  trustees  in  Bermuda; followed by

(ii)  the resignation of the trustees who are resident in the original place of creation; and

(iii)  either simultaneously or subsequently, changing the governing law to the laws of Bermuda.

Randall Krebs
Director