Bermuda Trust Law and U.S. Reporting

How Bermuda law defines a trust

Bermuda's Trusts (Special Provisions) Act describes a trust as a legal relationship formed when a settlor places assets under a trustee's control for a beneficiary or a stated purpose. It identifies the trust assets as a separate fund, with title held by the trustee or someone acting for the trustee. The trustee has power and a duty to manage, use, or dispose of those assets under the trust terms and duties imposed by law.^[1]

The Act says a settlor's reservation of certain rights, or the trustee's own beneficiary interest, does not necessarily prevent the relationship from being a trust. It also provides that certain reserved or granted powers in a Bermuda governed instrument do not, by themselves, invalidate the trust or stop it taking effect under its terms.^[1]

Those powers include the ability to amend terms, distribute trust property, appoint or remove trustees, and change governing law. The statute also addresses directions concerning company voting rights and the purchase or sale of trust property. The terms of the instrument and the Act determine how these powers operate.^[1]

Choice of governing law and administration

A trust is governed by the law expressly or implicitly chosen by the settlor in the instrument or other writing. If that law does not provide for the type of trust involved, the choice is ineffective and the Act points to its fallback rule. When no law is chosen, the applicable law is the law with which the trust is most closely connected.^[1]

The statute lists factors for that connection, including the designated place of administration, the location of trust assets, and the trustee's residence or business. The trust's purposes and the places where they are carried out also form part of the listed factors. These are statutory choice of law rules, not a statement that trustee residence alone determines tax treatment.^[1]

The chosen law governs validity, construction, effects, and administration, including trustee appointment and removal, trustee powers over assets, and accounting duties. A severable part of a trust, particularly an administrative matter, may be governed by another law. The Act separately recognizes circumstances in which Bermuda courts may have jurisdiction over a foreign trust, including where a trustee is resident in Bermuda or some administration occurs there.^[1]

Bermuda tax and reporting material

Bermuda's Trusts (Special Provisions) Act addresses trust structure and governing law. It does not set out a general income tax rule based on trustee residence or income source, or a trust income tax return filing rule. Bermuda also has a separate financial account reporting framework under the Common Reporting Standard (CRS). Bermuda reporting financial institutions obtain account information concerning residents of jurisdictions with which Bermuda has agreed to exchange information and report it to the Corporate Income Tax Agency for annual exchange.^[1][2]

Bermuda's CRS regulations set out the information exchanged, the financial institutions that report, covered account and taxpayer types, and due diligence procedures. Bermuda reporting financial institutions register with the Agency as competent authority. This describes information reporting by covered institutions, not a general tax filing obligation imposed on every trust solely because it is governed by Bermuda law.^[2]

For account holders and controlling persons, a TIN may be unavailable in valid circumstances, while institutions are expected to use reasonable efforts to obtain TINs for preexisting accounts where the information is absent from their records.^[2]

U.S. reporting when a U.S. person is connected

The IRS defines a U.S. person to include a U.S. citizen or resident. IRS guidance says a U.S. person who creates a foreign trust, transfers property to one, is treated as its owner, or receives certain distributions may have U.S. tax consequences and information reporting requirements. The Bermuda statute's governing law rules do not replace those U.S. reporting rules.^[6]

The IRS describes Form 3520 as the annual return used to report specified transactions with foreign trusts, ownership under grantor trust rules, and certain large foreign gifts or bequests. The Form 3520 instructions identify situations including transfers to a foreign trust, ownership of trust assets under the specified rules, and receipt of a distribution. A separate form is required for transactions with each foreign trust.^[6][7]

For a U.S. person treated as an owner under the grantor trust rules, the IRS says the foreign trust must file Form 3520-A and furnish annual statements to U.S. owners and beneficiaries. If the trust does not file, the U.S. owner may need to complete a substitute Form 3520-A, attach it to the owner's Form 3520, and furnish the required statements. The owner statement includes information about trust income reported on the owner's U.S. income tax return.^[6]

The IRS also describes Form 8938 and FinCEN Form 114 as possible additional reporting regimes in some cases. Those requirements can apply alongside foreign trust reporting. The applicable forms depend on the particular U.S. person's relationship and transactions, as described in the IRS instructions.^[6][7]

In more detail

The IRS describes several kinds of connections that can bring a U.S. person into foreign trust reporting rules. Its examples include creating or transferring property to a foreign trust, receiving a distribution, or being treated as the trust's U.S. owner under grantor trust rules.^[6]

Key points

Bermuda reporting financial institutions obtain financial account information about residents of jurisdictions with which Bermuda has agreed to exchange information, then report it to the Corporate Income Tax Agency for annual exchange.^[2]

Related reading

Trust structures under Bermuda legislation provides related context on Bermuda trust definitions, reserved powers, and governing law. Bermuda reporting and U.S. foreign trust forms covers Bermuda's information exchange frameworks and U.S. foreign trust forms. Jersey trust taxation and U.S. reporting offers a comparison with Jersey tax and U.S. reporting material. Cook Islands trust tax and reporting rules offers another jurisdictional comparison of trust rules and reporting.

Questions and answers

Related resources

Related glossary terms

• Controlling person: The CRS defines controlling persons and explains their role in due diligence and tax residence reporting for trusts, account holders, and reportable accounts.
• Trust: The Hague Convention describes a trust as a relationship in which a settlor places assets under a trustee's control for beneficiaries or a specified purpose.
• Proper law of a trust: The Jersey Trusts Law defines proper law as the jurisdiction's law expressed or implied in trust terms, or most closely connected to the trust when created.

Related articles and guides

• Jersey trust taxation and U.S. reporting: Jersey law on the tax treatment of trust distributions, with the IRS guidance for U.S. persons who are connected to a foreign trust and must report it.
• Cook Islands trust tax and reporting rules: Cook Islands trust legislation and revenue rules on tax information reporting, with the IRS reporting rules for a U.S. citizen with a Cook Islands trust.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.

Related pages

• Bermuda: overview: Start page for this jurisdiction.
• Types of trusts
• Trustee regulation and licensing
• Reporting and information exchange