Uses of Trusts in The Bahamas for Wealth Management

The Bahamas has been an independent nation since 1973 and is regarded as one of the premier offshore financial centers with steady growth and experience in financial services and a particular emphasis on servicing the needs of the private client.  Not only does The Bahamas have the necessary legislative framework in place to meet clients’ demands, it also has a universal reputation as an efficient, experienced and knowledgeable player in the market place. In fact, many of the world’s largest and most prestigious financial institutions have branches or subsidiary operations in The Bahamas, taking advantage of the country’s stable political and economic system.

It is important to understand that the trust is not a legal entity but rather, a relationship which allows an individual or a legal entity, known as the settlor, to transfer assets, which may be of almost any type to a third party or the trustee.  Such assets are to be administered for the benefit of the beneficiaries, the persons chosen by the settlor in accordance with the provisions of the trust deed.

In order to appreciate fully the uses of Bahamian trusts it would be helpful to outline the unique legislative environment which the jurisdiction offers. Particular statutes of interest include the Fraudulent Dispositions Act 1991, the Trusts (Choice of Governing Law) Act 1989, amendments to the Trusts (Choice of Governing Law) Act 1989 in 1996, the Perpetuities Act 1995, the Trustee Act 1998 and the Purpose Trusts Act 2004.

The Fraudulent Dispositions Act 1991 provides ‘asset protection’ once the limitation period of two years has passed.

The Trusts (Choice of Governing Law) Act 1989 (as amended) provides that assets held in a Bahamian trust may be protected from forced heirship claims or the enforcement of other foreign law rules which are adverse to the free disposition of property.  Amendments to the Trusts (Choice of Governing Law) Act 1989 clarified the definition of heirship rights and made foreign judgements which relate to heirship and matrimonial claims unenforceable in a Bahamian Court.

The Perpetuities Act, 1995, modernised the existing law relating to perpetuities and instituted a period determined by a life or lives in being plus 21 years or 80 years, which has since been extended to 150 years.

Probably the most significant changes were made by the Trustee Act 1998, as amended (the ‘Act’), which  has clarified trust law in The Bahamas by allowing for a settlor to retain certain powers without necessarily rendering the trust invalid or causing a trust created inter vivos to be characterised as a testamentary disposition [S. 3]. 

Additionally, the Act gives the often utilised position of ‘protector’ legislative sanction. The protector may be conferred with ‘any powers including the power to remove trustees, appoint new or additional trustees and exclude any beneficiary of the trust’ [S. 81].

The Purpose Trust Act 2004, provides for purpose trusts. A purpose trust is, as its name suggests, a trust set up for the achievement of a particular purpose authorised by the trust instrument. Prior to the 2004 legislation The Bahamas did not recognise a non charitable purpose trust. There is a provision for an authorised applicant similar to an enforcer in other jurisdictions who has certain obligations and rights with respect to the trust.

There are no income, capital gains, wealth or estate taxes in The Bahamas, therefore, when using Bahamian vehicles, planners do not need generally to take local taxes into consideration. Despite this favourable tax environment,  the Trustee Act 1998, exempts trusts for non-resident beneficiaries (for exchange control purposes) specifically from taxation except for a Trust Duty of US$50 on the creation of a trust.   Stamp duty on an ad valorem basis will only be charged when Bahamian real estate is conveyed to the trustees or non-beneficiaries.

Prospective settlors need not worry that by settling a trust in The Bahamas they will be perceived automatically as ‘tax dodgers’.  The government of The Bahamas has now met the standards for transparency and effective exchange of information, endorsed by all members of the Organisation for Economic Co-operation & Development (OECD) and non-OECD member jurisdictions who are principal competitors in the provision of cross border financial services.  Presently, The Bahamas is a party to 27 TIEAs that provide for the exchange of information upon request, and is in negotiations for several additional agreements.

This favourable environment means that trusts can be utilised to meet any number of objectives as outlined below.

Estate Planning

Trusts are probably the most efficient means of planning for the management and transfer of assets upon death.  They can be used to preserve family wealth, for example, a settlor may wish for the family business to be held by one party rather than split among several heirs.  Where property is held in a trust, the delays and costs of probate applications can be avoided.

Protecting Incapacitated Persons

One of the most under-rated advantages of a trust is to provide for individuals who are unable to manage their own affairs or who may be vulnerable to undue influence for example minors, the aged or persons who are incapacitated.

Tax Planning

The special nature of a trust is often helpful in mitigating estate income and capital gains taxes because once assets are transferred to a trust, they may no longer be considered as belonging to the settlor and or the beneficiaries.  It is important that any structuring for tax purposes be done in collaboration with legal counsel and or accountants from the appropriate jurisdictions.  Good examples of trusts being used to alleviate tax are US foreign grantor trusts, Canadian pre- immigration trusts and split trust structures for Mexican residents.

Asset Protection

Trusts offer significant asset protection because, upon creation, the settlor transfers assets from his personal estate to the trust to be subject to the terms of the trust.  The measures to protect assets in a trust from the claims of future and unknown creditors were introduced by the Fraudulent Dispositions Act which came into force on April 5, 1991. This Act limits an attack on trust assets by creditors in a number of ways so that a transfer of assets will be voidable if the following elements are present:

• the liability to creditors must have existed at the date of transfer;
• the transfer must have been at an undervalue;
• in making the transfer there must have been an intent to defraud the creditor;
• the transfer is voidable by the creditor who is prejudiced to the extent of his claim; and
• the creditor must bring his action within two years of the transfer.

Accordingly, any disposition of property made with intent to defraud is voidable at the instance of the creditor seeking to set aside the disposition.  It should be noted that care must be taken in the drafting of the trust instrument and that the timing of the transfer of assets to the trust can be critical. 

Forced Heirship Planning

The advantages of the Trusts (Choice of Governing Law) Act, 1989 (as amended) have already been explained, however, notwithstanding the provisions of the Trusts (Choice of Governing Law) Act, 1996, the settlor should take advice both in The Bahamas and in his country of domicile to ensure that the creation of a trust to avoid forced heirship rules has the desired effect.

Charitable Trusts

It has become increasingly evident that charitable giving is very important to many high net worth individuals and charitable trusts can be one means of carrying out  the settlor’s wishes on a more individualised basis.  These trusts are created specifically for charitable purposes, which include (i) the relief of poverty, (ii) the advancement of education, (iii) the advancement of religion; or (iv) any other purpose beneficial to the community. Charitable Trusts are not required to benefit named beneficiaries or classes of beneficiaries.

Authorised Purpose Trusts

Under the Purpose Trust Act, 2004 (as amended) authorised purpose trusts, can be established for non-charitable purposes and/or individuals.

Purpose trusts have many estate planning and commercial uses including:

• the holding of shares of a private trust company.
• a trust which has both philanthropic and charitable purposes.

• asset purchase or financing transactions to provide security for an entity which finances the purchase.

• separating voting from economic control.

Private Trust Companies

The government of The Bahamas recently introduced The Banks & Trust Companies Regulations (Amendment) Act, 2006 and The Banks & Trust Companies (Private Trust Companies) Regulations, 2007 to facilitate and regulate private trust companies.  As private trust companies can allow the settlors and beneficiaries more involvement and control in its administration, the new regime granting numerous regulatory exemptions gives The Bahamas a renewed prominence in the field. 

Not only does the trust industry in the jurisdiction continue to attract high net worth individuals and their advisers for the reasons stated above, clients have also become aware of its potential as a suitable location in which to reside.