Bermuda Trusts And Asset Protection - How Much Control Will Tip The Balance?

• Published date: 26 May 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation, Trusts
• Law Firm: Carey Olsen
• Author: Mr Keith Robinson and Ashley Fife

On occasion, when settlors instruct us to draft trust deeds governed by Bermuda law they may seek to retain extensive powers. It is then for us to advise on how retaining powers may impact on the asset protection qualities of the trust.

In summary, in most jurisdictions, trust assets will be more vulnerable to attack from a settlor's creditors in the following scenarios:

1. A settlor's retention of dispositive powers (particularly positive powers e.g. powers to direct the trustee in contrast to a power to veto a trustee's proposal) generally renders a trust more vulnerable to attack by creditors. Retaining powers to revoke the trust and/or a general power of appointment (i.e. to direct distribution of trust assets to anyone including the settlor) render trust assets particularly vulnerable as a settlor's creditors may seek to compel the exercise of those powers to access trust property to discharge the debt owed to them. A key case on this point is TMSF v Merrill Lynch [2011] UKPC 17. The trust's vulnerability to being set aside is increased where the settlor assumes the role of trustee, particularly a sole trustee as in DQ v BQ [2010] SC (bda) 40 Civ.
2. A settlor's retention of a large number of powers (e.g. a mixture of dispositive and even administrative powers and whether positive or veto powers) may also render trust property vulnerable to attack by a settlor's creditors. JMP Bank v Pugachev [2017] EWHC 2426 (Ch) and Rahman v Chase Bank (C.I.) Trust Co. Ltd. [1991] JLR 103 are key cases that considered scenarios of this nature.
3. If a settlor transfers of property into a trust with the dominant intention of defeating particular creditors it is vulnerable to attack from claims from those particular creditors.
4. A trust may be set aside as a "substantive sham" if a settlor transfers property to a trustee to hold on trust but irrespective of the trust's terms, the settlor intends and continues to treat the property as the settlor's own and the trustee is recklessly indifferent to, or complicit with, that intention. Snook v London & West Riding Investments [1967] 2 QB, Pugachev's case and Re Esteem [2003 JLR 188] all considered scenarios of this nature.

Generally, the fewer powers reserved by the settlor, the better from an asset protection perspective. By comparison, a settlor's retention of investment/administrative powers (as opposed to dispositive powers), generally render trust assets less exposed to creditor attacks. Again, by comparison, a settlor's retention of veto powers (i.e. where trustee requires the settlor's consent to exercise the power) as opposed to positive powers (e.g. powers that enable the settlor to direct the trustee to exercise a power), generally render trust assets less exposed to creditor attacks.

Bermuda's trust legislation includes extensive reserved power provisions that seeks to protect a...