The Bahamas: Asset Protection Trusts & Shari’a Trusts - New Wine in Old Wine Skins

The Bahamas

The Bahamas is a sovereign archipelagic nation of 700 islands and cays located off the coast of Florida.  It is considered to be the Zurich of the west. The laws of The Bahamas originally came from English law which was received when The Bahamas was an English colony. The Bahamas enjoys stable parliamentary democracy under the rule of law and also has a strong financial services sector with many reputable offshore banks and trust companies providing trust and corporate services.

Asset Protection Trusts And Shari’a Trusts

The Bahamas has enacted legislation that protects settlors from the sham doctrine, and which facilitates the creation of purpose trusts. Shari’a trusts are also referred to as Shari’a compliant trusts. These are similar to asset protection trusts set up to avoid forced heirship laws. Indeed, the settlor will have to determine the extent to which Shari’a law should apply because this is civil law which applies forced heirship rules that restrict the settlor from disposing of more than one-third of their assets upon their demise[i]. Such trusts should strike a careful compromise between religious beliefs and family values.  They may be concerned with the preservation of family values, continuity of management of family-owned businesses, dealing with family obligations towards the payment of Zakat, and charitable purposes[ii].

Letter Of Wishes

A letter of wishes is invaluable when setting up a Shari’a trust because if one of the beneficiaries passes away, clear guidance should be given as to how Shari’a law as to succession should be applied. The settlor may not wish for forced heirship rules to apply in such circumstances or may wish to strike a balance if they wish for it to apply. Despite the nonbinding nature of the letter of wishes, it would be helpful to clarify the settlor’s intentions if such an event were to take place.

Private Trust Companies (PTCs)

Most clients may prefer to maintain control over the family business and in those circumstances, it would be advisable to set up a private trust company for the client to manage their own trust. These are often combined with purpose trusts to hold the shares in the settlor’s business.  Usually, this is done to avoid the duty to account to the beneficiaries altogether. The purpose trusts legislation, however, provides for authorised applicants with the power to enforce the purpose trust.

Trusts Set Up To Exempt Trustee From Duty To Oversee And Manage Trust Assets

Trusts may be set up to hold the shareholding or controlling interest in the settlor’s business empire. However, in circumstances where a professional trust company is appointed trustee, the trust deed will have to contain an exemption clause to excuse the trustee from their common law duty to oversee and manage the trust assets (the rule in Bartlett v. Barclays Bank[iii]). For example, section 19 of The Trustee (Amendment) Act 2011 (“TAA 2011”)[iv] amends the Schedule to the principal legislation and provides that Trustees shall not be bound to interfere in the business of the company in which this settlement is interested and can assume proper management.

Protectors And Protector Committee

Shari’a trusts will often appoint a protector or protector committee that includes persons familiar with Shari’a law. Trustees will have the opportunity to seek advice from a protector or family advisor to ensure that investments are compliant with the tenets of the law or they may appoint a Shari’a compliant portfolio manager to offer advice or manage the trust investments in a Shari’a compliant manner.

Directed Trusts

Section 13 of the TAA 2011 amends the principal Act and provides that trustees are exonerated once relying on the express instructions of the settlor while making investments, provided that the trust instrument contains an investment power shall be exercised by the trustee as and when directed by another person.

Power To Delegate Trusts

Section 8 of the TAA amends the principal Act and provides that, subject to a contrary intention in the trust instrument and notwithstanding any rule of law or equity to the contrary, a trustee may by power of attorney or any other written instrument, delegate to any person in or outside The Bahamas the execution or exercise of all or any trust, powers, and discretions vested in him as such trustee either alone or jointly. This means that a Shari’a compliant portfolio manager or investment manager can even be given power of attorney to manage the trust portfolio under this provision and in accordance with the trust instrument.

The Use Of Arbitration To Determine Trust Disputes Regarding Application Of Shari’a Law To Bahamian Trusts

Section 18 of the TAA 2011 amends the principal legislation and provides that section 91A declares that arbitration may be used for the determination of trust disputes and this provision is significant with regard to disputes with respect to the application of Shari’a law for interpretation of the trust. This provision incorporates the Arbitration Act 2009 to the determination of trust disputes. Section 91B deals with the powers of the arbitral tribunal. This includes the ability to exercise all the powers of the Court under the inherent jurisdiction. It is advisable to appoint arbitrators skilled in Shari’a law for the applicability of provisions of the trust deeds that turn on the interpretation of the finer points of Shari’a law. This arbitral panel can also appoint representatives of the interests of any person whether born or unborn or even a next friend or guardian ad litem. This will aid in ensuring that the trust assets are administered in accordance with the client’s religious beliefs, in accordance with the rule of law, and the principle of the freedom of disposition.

No Contest Clauses

Section 17 of the TAA 2011 amends the principal Act and provides for the termination of the interest of a beneficiary upon the trust being challenged once the trust makes provision for the termination of the interest of a beneficiary upon the validity of the trust being challenged, in whole or in part, in any court within or outside The Bahamas or any action being taken to assist, promote, or encourage a challenge.

Incapacitation Of Settlor Or Beneficiary

Section 19 of the TAA 2011 amends the Schedule to the principal Act and provides if the Settlor is incapacitated, then the rights or powers reserved to them during their incapacitation are exercisable by the Protector or by another person designated by the trust instrument. If a Beneficiary is incapacitated, then the trustee may apply income or capital of the trust fund for their benefit by paying the same to a court appointed guardian receiver or such other person without being liable for the due application thereof by such person. A person may be declared incapacitated if deemed to be so by a Court of Competent Jurisdiction upon the evidence of two qualified examining physicians that they are either of unsound mind or physically impaired.

Conclusion

Shari’a trusts may be seen as evidence of the hybrid nature of the offshore trust. The Shari’a trust enables trustees to administer trusts in accordance with the needs of their Islamic clients and also to ensure that clients’ religious beliefs are observed in selecting investments for the trust. This is enabled by appointing protectors or protector committee members that are Shari’a scholars and even a Shari’a compliant portfolio manager. The trust may be a directed trust to absolve the trustee of liability once they follow the directions of the settlor, protector, or portfolio manager based on the terms of the trust instrument. The trust can also provide for a no contest clause and an arbitration clause to ensure that the administration is consistent with the wishes of the client and follows Shari’a law. The members of the arbitral panel may also consist of skilled Shari’a legal scholars. The attractiveness of the Shari’a trust is that it ensures the settlor reserves control over decision-making, investments, ensures continued management of the family business, and succession planning without having to go through a cumbersome probate process in the event of the death of the family patriarch. Most importantly, it ensures the transmission of shared values from one generation to the next.

References

Belle, Professor Rose-Marie Antoine. Offshore Financial Law Trusts and Related Tax Issues. (2^nd Edn). Oxford UP.

Crespel, Martyn. Structuring trusts for Shari’a compliant clients.<https://www.praxisifm.com/news-and-views/structuring-trusts-for-sharia-compliant-clients/ >

[i] Belle, Professor Rose-Marie Antoine. Offshore Financial Law Trusts and Related Tax Issues. (2^nd Edn). Oxford UP, pg 71.

[ii] Crespel, Martyn. Structuring trusts for Shari’a compliant clients.< https://www.praxisifm.com/news-and-views/structuring-trusts-for-sharia-compliant-clients/ >, para 3. N.B., Zakat is the imposition of a donation of a certain portion of individual wealth annually to charitable causes required by Islam.

[iii] [1980] 1 Ch 515.

[iv] This legislation is an amendment to The Bahamas main trust legislation The Trustee Act 1998.

Mr. Shivron Gay, Esq., LLM, TEP
Shivron Gay is an attorney at law & notary public with 10 years PQE, practising at The Bahamas Bar, and a director of the STEP Bahamas Branch. He is a past Vice Chairman of the STEP Bahamas Branch.