Bermuda: Bermuda amends firewall provisions of trust law and restores settlor’s freedom of disposition over children

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Vanessa Schrum reviews recent changes to Bermuda’s trust laws that seek to modernize “firewalls” provisions and restore a settlor’s freedom of disposition to children.

Recent improvements have been made to Bermuda’s trust law to modernize and strengthen so-called “firewall” provisions and to clarify a grantor’s freedom of disposition with respect to children.

The Trusts (Special Provisions) Amendment Act 2020 (Amendment Act) and the Trusts (Special Provisions) Amendment (No 2) Act 2020 (Amendment (No 2) Act) both entered into force on August 5, 2020.

The new legislation was drafted with input from the English QCs of XXIV Old Buildings, Lincoln’s Inn in London, and aims to ensure Bermuda remains a competitive jurisdiction for trust structures.

Changes to the Firewall Provisions of the Trust Act

The Amendment Act amends the firewall provisions contained in Sections 9 to 11 of the Trusts (Special Provisions) Act 1989 (Main Act). Amendments (a) clarify the jurisdiction of the Supreme Court over Bermuda trusts and foreign trusts connected with Bermuda, (b) improve and modernize the provisions of the Main Act regarding the application of foreign laws and foreign ordinances in Bermuda trusts, and (c) make consequential amendments to the Conveyancing Act 1983.

When a Bermuda Trust is properly constituted, the amended firewall provisions now serve three purposes:

  • to protect against the application of a foreign law relating to inheritance rights, marital / other family relations, or insolvency matters, in the resolution of any matter relating to a Bermuda trust
  • exclude the application of foreign law to matters relating to the validity, interpretation, effects or administration of a Bermuda trust, and
  • to prevent the recognition or enforcement of foreign orders relating to property held in a Bermuda trust (except real property outside Bermuda), which is inconsistent with Bermuda law

More specifically, the main law has been amended as follows:

  • a new section 1A has been added to improve certain definitions in the main law such as “foreign court” (to cover foreign arbitration and other court decisions), “foreign order” (to include provisional or final judgments, foreign court awards, orders or other decisions) and “settlor” (to include testator of a testamentary trust and settlor / trustee of a declaration of trust)
  • a new definition of “Bermuda Trust” and an amendment to Section 6 (2) of the Principal Law, as it was specifically designed to allow the possibility that Bermuda Law could apply to a severable part of a trust only – of particular importance under firewall arrangements
  • section 9 of the Principal Law has been repealed and replaced to clarify that the Supreme Court has the power to rule on claims concerning the validity, interpretation, effects or administration of the trust, including all matters set out in Article 7 (a) – (j) of the Main Law. These matters include the appointment of trustees, rights and duties of trustees, powers of delegation, investment and accumulation of income, duration of the trust, relationship between trustees and beneficiaries and any liability, modification or termination of the trust and distribution of the assets of the trust. The new section 9 improves the provisions of the current section; for example, it provides for the express jurisdiction of the Supreme Court when the trust deed specifies it
  • Article 10 of the Main Law has been repealed and replaced. Simplified Section 10 now provides for an exclusion from foreign law, where applicable, instead of providing for a general application of Bermuda law, subject to exceptions. This is accomplished by specifying the circumstances under which any foreign law is to be excluded from application to a Bermuda trust. These circumstances include foreign laws relating to inheritance rights, marital / other family relationships or insolvency matters. No foreign law excluded in these circumstances shall apply to the resolution of any matter relating to the establishment of a Bermuda trust (or “rocket launch”), including the ability of a grantor to settle a settlement. trust, the rights / interests in the property so settled, the validity of the disposition of the property or any obligation or liability of a settlor, trustee or beneficiary of a Bermuda trust. The new section 10 (3) provides that once the trust has been established (or the “rocket has been launched”), no foreign law shall apply in determining any question concerning validity, construction, the effects or administration of a Bermuda trust, including any of the matters set out in section 7 (a) – (j) of the Principal Act. Where the application of foreign law is excluded to this extent, the court applies the law of Bermuda. The firewall protections offered under the new section 10 do not apply to foreign lands or in cases where a foreign law has been chosen to apply to any separable aspect of a Bermuda trust in accordance with section 8 of the Main Law.
  • Article 11 of the main law has been repealed and replaced in order to supplement the protective measures provided for in the new Article 10 by preventing the execution or recognition of any order of a foreign court when such order conflicts with the new article 11 provisions
  • consequential amendments were made to the Conveyancing Act 1983 (Bermuda’s fraudulent transfer legislation). Section 36G of the Conveyancing Act 1983 has been repealed and replaced in order to simplify language and to allow consistency with updates to the firewall provisions of the Main Act. This clearly shows that Bermuda’s fraudulent transfer laws will not allow a claim by a creditor if the claim is excluded by Bermuda’s firewall provisions.

Freedom of disposition of the grantor with regard to children

The amending law (no.2) amends the principal law in order to grant freedom of disposition to a settlor of a trust in the circumstances where an express intention appears in the trust deed with regard to the beneficiaries who are the beneficiaries. children of the settlor, contrary to the provisions of the Children Act 1998. It also makes consequential amendments to the Children’s Act 1998.

For your information, the Children’s Law Amendment Act 2002 amended the Children’s Act 1998 (with effect from 2004) by including new sections 18A and 18B which abolished the distinction between legitimate children and children. illegitimate children when interpreting references to them in instruments (including international trusts) and statutory provisions. While this amendment dealt with the equal status of children (which is particularly relevant for the arrangements for custody, custody and supervision of children), it resulted in restricting the freedom of constituents to dispose of property. private by making it difficult, but not impossible, to exclude illegitimate (or even legitimate) children from the benefits of the trust.

The amending law (no. 2) amends the main law by inserting a new definition of “child”. This provides that a reference to a child or children in a trust deed is to be interpreted in accordance with section 18A of the Children’s Act 1998 (i.e. equal status of children), unless an express contrary intention appears in the trust deed. In addition, section 18B of the Children’s Act 1998 is amended to exclude the application of section 18A to a trust deed in the event that the trust deed expressly indicates a contrary intention, as provided for the new legislation.

The recent amendment reaffirms the freedom of disposition so that, like many competing jurisdictions, Bermuda trust settlers can now distinguish between legitimate and illegitimate children (if they choose) and confidently know that beneficiaries of the Trust assets are the people they have chosen. . This should be especially appealing to settlers with religious backgrounds or settlers who wish to benefit children and more distant issues (whether legitimate or illegitimate) in different ways. This follows the position of English law and many other common law jurisdictions where there is a presumption that the expressions “children” and “issue” in an instrument include legitimate and illegitimate children, but only in circumstances where that presumption is subject. to a contrary intention expressed. .

First published by LexisPSL Private Client

Originally posted Aug 20, 2020

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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