Bermuda

Trust law framework

Bermuda trust law is rooted in English common law and has been supplemented by the Trusts (Special Provisions) Act 1989 (as amended), which introduced reserved powers trusts and purpose trusts. Bermuda has no income tax, capital gains tax, or estate tax, and there is no U.S.–Bermuda income tax treaty.

For U.S. tax purposes, Bermuda trusts are foreign trusts under Treas. Reg. §301.7701-7. The Bermuda trust sector is long-established, and many trusts have been in existence for decades, sometimes predating the current reporting requirements. This can create compliance gaps when a U.S. person inherits or becomes a beneficiary of a long-standing Bermuda trust without understanding the reporting obligations.

Reserved powers trusts and purpose trusts

The Trusts (Special Provisions) Act 1989 expressly permits settlors to reserve certain powers—such as the power to revoke the trust, to add or remove beneficiaries, to appoint and remove trustees, or to direct investments—without invalidating the trust or causing it to be treated as a sham under Bermuda law.

For U.S. tax purposes, reserved powers are highly relevant. A settlor who retains the power to revoke the trust is the owner under IRC §676. A settlor who retains control over beneficial enjoyment (e.g., the power to add or remove beneficiaries) is the owner under IRC §674. These retained powers routinely cause Bermuda reserved powers trusts to be grantor trusts for U.S. income tax purposes, triggering Forms 3520-A and 3520 Part II.

Bermuda purpose trusts (non-charitable) are used for holding structures and corporate governance purposes. The classification analysis parallels that of Cayman STAR trusts: the absence of individual beneficiaries can complicate the §679 analysis.

Insurance-linked trusts

Bermuda is a global hub for insurance and reinsurance. Captive insurance companies, insurance-linked securities (ILS), and special purpose insurers frequently use trust structures to hold collateral or segregate assets.

A U.S. company that establishes a captive insurance subsidiary in Bermuda may use a trust to hold reserves or collateral. If the arrangement is classified as a trust for U.S. purposes, the foreign trust reporting requirements of §6048 apply. The IRS has scrutinized captive insurance arrangements closely, and the trust classification question adds a further layer of complexity.

ILS structures (catastrophe bonds, sidecars, and collateralized reinsurance) frequently use Bermuda trusts to hold collateral. The U.S. tax treatment of the trust depends on the specific structure, including whether the trust has a U.S. owner or U.S. beneficiaries. Practitioners working with ILS structures should confirm the trust reporting position as part of the overall tax analysis.

Reporting obligations and penalties

The standard §6048 framework applies: Part I for transfers, Part II and Form 3520-A for U.S. owners, Part III for distributions. Penalties under §6677(a) are 35% of the gross reportable amount for Parts I and III. Under §6677(b), the penalty for Part II and Form 3520-A is the greater of $10,000 or 5% of the gross reportable amount.

Because Bermuda has no income tax, no foreign tax credits are available. For grantor trusts, the U.S. grantor reports all trust income on their personal return at full U.S. rates.