Historically, setting up a family property trust has been a tax efficient way for your loved ones to inherit your property portfolio, but how do you set one up? What does it mean for you personally, and is it still the most cost-efficient way to leave something meaningful to your family?
Darren Donnithorne, Director and Head of the Property Practice Group at Marshall Diel & Myers, explains the basics of the process as well as some of the benefits, costs and potential complications of setting up such a trust.
How do you set up a family property trust in Bermuda?
A family property trust is set up by your lawyer and is typically comprised of two principal documents – the trust deed and a letter of wishes.
To draft the deed, your attorney will need to know the identities of the trustees and the beneficiaries. The letter of wishes, which is optional and non-binding, expresses your intentions as to how the assets within the trust will be managed and distributed going forward.
What considerations need to be made when setting up a family property trust?
The person setting up the trust, the settlor, must first decide what sort of trust they want.
The vast majority of family property trusts in Bermuda are ‘irrevocable discretionary trusts’. This trust places the asset beyond the control of the settlor, meaning they cannot simply retrieve it from the trust at some future date. The asset will be owned and managed by the trustees for the benefit of the beneficiaries. Typically, the trustees will retain full discretion as to which beneficiary benefits and in what proportion.
You will need to decide who to include as the beneficiaries of the trust. The trustees will usually retain a right to add or remove beneficiaries in future, depending upon circumstances.
You also need to identify the trustees, in particular whether or not they will be professional trustees. Professional trustees operate at arms’ length and charge a fee for their services. They are experienced in such matters and will assist in the efficient management of the trust. Individual trustees are sometimes used as an alternative, but care should be taken to ensure they are experienced in such matters, as the trust structure needs to be respected and properly managed to be beyond reproach.
Another consideration to make is whether or not you want an individual to act as a protector of the trust. The protector can control various matters affecting the trust, including the acquisition or disposal of certain assets and the dismissal and appointment of trustees. They provide an extra level of control and can give the settlor additional comfort.
What are the benefits of a property trust?
The main benefit is to ensure succession without the need for a grant of probate and payment of stamp duty on the value of the property.
If I put a house into a trust and name my children and grandchildren as beneficiaries, they stand to benefit from the property without the need for my executor to get a grant of probate and vest the property in them through my estate. This is because the asset is owned by the trustees and will not form part of my personal estate when I die.
Moreover, you can look to customise and control how your wealth is distributed via the trust and include conditions on who benefits and when. For example, you can state that you’d like the money in trust to be given to your grandchildren once they turn 18 and only to be used for college tuition.
There is also a degree of flexibility with such trusts. Your trustees can remove or add beneficiaries as circumstances dictate. For example, if you set up a trust with your children as beneficiaries, then later get married, your trustees can add your spouse as a beneficiary, if this accords with the intention and wishes expressed when the trust was established.
A family property trust also provides asset protection for high-risk individuals whose professions could make them vulnerable to personal claim.
If you put your house into a family property trust, can you live there without paying rent?
Yes. One way to deal with this scenario is to establish classes of beneficiaries. You could name yourself as the primary beneficiary for the duration of your life, with your children stepping into that role when you pass away. The trustees can also grant you a lease of the property for a specific term or for the remainder of your life.
Are there any potential negative consequences of a family property trust?
There can be significant stamp duty costs for placing your existing Bermuda property into a trust depending upon how the transaction is structured. Typically, the process works best when you are acquiring a new property to go straight into the trust.
If the trust is managed by professional trustees, there will be fees to pay. The cost is more of a consideration since the advent of the Primary Family Homestead exemption. You can elect one property as your principal dwelling and obtain an exemption from the stamp duty tax that would otherwise be payable in respect of that property on your death. Therefore, if you only have one property, part of the reason for holding it within a trust is obsolete.
Also, when you place an asset into a trust, you no longer own it. It is owned by your trustees to control and manage for the beneficiaries. You are therefore relinquishing control over that asset.
What complications can arise if the trust beneficiaries are not Bermudian or not resident here?
Non-Bermudians cannot hold Bermuda property without Government sanction. This rule applies to their role as beneficiaries of a trust. Trustees need to either ensure the appropriate sanction is obtained or exclude that non-Bermudian as a beneficiary in respect of the restricted assets.
A non-resident Bermudian beneficiary should seek advice from an accountant about any tax obligations in their home jurisdiction.