Bahamian trusts and foundations revisited

clock • 8 min read

In the face of ever-evolving international standards of regulation, the global landscape of financial services and wealth management is in a constant state of flux. This has never been more true than within the past two years as international financial centres (IFC) have had to adjust at almost break neck speed to the mandates of the OECD and EU which call for the substantiation of economic presence, removal of preferential tax regimes and for increased transparency in relation to corporate entities.

Largely, IFCs have responded by legislating to require corporate entities existing under their laws to have economic substance within their respective jurisdictions, to remove any preferential tax treatment non-resident owned entities may receive and to create beneficial ownership registers for those entities.

The Bahamas' response came, towards the end of 2018, in the form of the Commercial Entities (Substance Requirements) Act, Removal of Preferential Exemptions Act and the Register of Beneficial Ownership Act.

The Trustee Act, 1998 is the embodiment of that reform and provides the corner stone of Bahamian trust legislation. Although it is derived from the English Trustee Act 1925, the Bahamian Trustee Act has taken on a life of its own” The Trustee Act, 1998 (the "Trustee Act") is the embodiment of that reform and provides the corner stone of Bahamian trust legislation.

As a result of increased regulation, naysayers of IFCs have questioned the continued utility of corporate entities in private wealth management. However, the diversity of The Bahamas' offerings in the wealth management sphere- which include trusts and foundations- will help it to remain a steadfast and key player in the international financial services and wealth management markets.

Trusts at a glance

The Bahamian trust is a long standing fixture in the international wealth management market and is a favourite amongst trust practitioners the world over for asset protection. However, The Bahamas' history of recognising trusts is even longer. This history is deeply rooted in the ancient common law legal system of England.

In modern times, much of the law relating to trusts in The Bahamas has been supplanted by innovative statutory reform. The Trustee Act, 1998 (the "Trustee Act") is the embodiment of that reform and provides the corner stone of Bahamian trust legislation. Although it is derived from the English Trustee Act 1925 , the Bahamian Trustee Act has taken on a life of its own.

One innovative feature of the Trustee Act is its displacement of the rule in Saunders v Vautier by barring beneficiaries from terminating or modifying a trust if such action would defeat a material purpose of the settlor in creating the trust.

Additionally, the Trustee Act permits an extensive arrangement of powers to be reserved to the settlor (or to any other person for that matter) which is a marked departure from English common law.

This is particularly interesting in light of the English High Court's recent decision in the case of JSC Mezhdunarodny Promishlenniy Bank v Pugachev (the "Pugachev case") which declared that certain New Zealand law governed trusts were illusory because the economic settlor, Mr Pugachev was deemed not to have divested himself of his beneficial interests in the trusts' assets, or, in the alternative that the trusts were a part of a sham which was intended to conceal Mr Pugachev's control of the assets settled in them.

A key factor in the court's ruling was that the terms of trusts reserved extensive powers to the Protector, who by design, happened to be Mr. Pugachev, including the power to remove trustees with or without cause.

New Zealand law, as applied in the case, is similar to English law in that it does not recognise the concept of reserved powers; Bahamian law, on the other hand, does. The Trustee Act permits powers to be reserved to a settlor of a trust (or to any other person, such as a Protector), including the power to appoint the settlor as the protector of a trust and also the power to remove trustees, and provides expressly that a trust shall not be invalidated by reason of such powers being reserved to the settlor. Therefore, it is unlikely that the English court would have arrived at the same conclusion- and near impossible that a Bahamian court would have, if the trusts in the Pugachev case had been governed by Bahamian law.

The most recent amendments to the Trustee Act were made in 2016 and were made to re-assert the rule in Re Hastings-Bass which was eroded by the 2013 decision in the conjoined appeals of Pitt v Holt and Futter v Futter ("Pitt & Futter").

In sum, the rule in Re Hastings-Bass allowed trustees to apply to the court to void an exercise of their power where they either failed to take into account relevant considerations or took into account irrelevant considerations. However, in Pitt & Futter, it was decided that only beneficiaries could apply to the courts in these instances and that the exercise of power must involve a breach of trust by the trustee in order for the beneficiaries to do so. The 2016 amendments to the Trustee Act effectively removed these conditions where a Bahamian law governed trust is concerned, thereby preserving a useful means for trustees to unwind the unintended and harsh consequences that may flow from an exercise of their power.

The Trustee Act is underpinned by a cadre of supporting legislation. Notably, one such piece of legislation, the Fraudulent Dispositions Act, 1991 forms the crux of the Bahamian asset protection regime. This Act limits when and in what circumstances a creditor of a settlor may claim against the assets of a trust.

Specifically, creditors are only permitted to claim against trust assets if the transfer of the assets to the trust was made at an undervalue, with an intent to defraud creditors who would be prejudiced by the transfer. Only in these circumstances are creditors given a period of two years within which to bring their claims, otherwise their claims are statute barred.

While other IFCs, such as Cayman, Bermuda and Anguilla, have similar fraudulent disposition legislation, the limitation period under the Bahamas' legislation (i.e. two years) is significantly shorter, with Cayman's and Bermuda's limitation periods being six years and Anguilla's being three years. In light of this protection, a person embarking on a speculative business venture may insulate his or her assets from creditors ahead of time in the event that the venture fails.

The asset protection element of Bahamian trusts is also enhanced by the Trusts (Choice of Governing Law) Act 1989. This act clarifies the conflict of laws rules as they relate to Bahamian trusts and prevents the Bahamian courts from recognising or enforcing foreign judgements based on matrimonial or forced heirship claims made against the settlor or a beneficiary of a trust.

Effectively, attempts by any person, including a spouse of a settlor or beneficiary of a Bahamian trust, to attack the assets settled in that trust through the courts of a foreign jurisdiction would not be given effect to by a Bahamian court.

Another notable piece of supporting legislation is the Rule Against Perpetuities (Abolition) Act, 2011 which abolished the requirement for a trust to have a perpetuity period. As such, trusts may exist in perpetuity. This enables settlors to make better provision for generations to come. Also, where a trust is a component in a commercial structure, it would be afforded the same potential to exist in perpetuity as a company within that structure.

 RE-DISCOVERING THE FOUNDATION

The foundation is a relatively new addition to The Bahamas' wealth management structure arsenal.

Foundations, although not strangers to Bahamian practitioners, were formally introduced to Bahamian law under the Foundations Act, 2004. The foundation is originally a creature of civil law, with similarities to both a trust and a company.

This becomes apparent when considering that foundations, under Bahamian law, may have beneficiaries like a trust and that they are separate legal entities capable of holding assets and being sued in their own name, akin to companies. The dualistic nature of the foundation therefore makes it an apt choice for a standalone entity, to hold and administer wealth for the benefit of a family, or for a component of an international estate plan, used to hold assets for investment and re-investment.

Under Bahamian law, a foundation is required to ensure that one of its main purposes is the management of the assets settled into it. Its primary purpose must be to carry out the wishes of its founder as set out in its constitutive documents (i.e. charter and/or articles). It may engage in commercial activities, such as the buying and selling of further assets, provided those activities are incidental or ancillary to the foundation's main purposes.

In a familial wealth management context, the main purpose of the foundation may be for instance: to provide for the financial welfare of family members, inclusive of their maintenance and education. Therefore, the foundation, in order to ensure that it has assets to do this, may trade its assets to produce the necessary income flows. In a large commercial structure, the foundation may be used as holding vehicle for the shares of one or a number of companies.

The governance of a foundation can look very much like a company, with officers appointed to undertake its day to day management and decision making, much like company directors. In the alternative, where no officers have been appointed, the governance of a foundation is undertaken by a foundation council or other similar body. In addition, the founder of a foundation may reserve powers to himself or herself, such as the power to appoint and remove officer or foundation council members, or to veto distributions of the foundation's assets, similarly to the reservation of powers permitted for Bahamian trusts.

Foundations are required to be registered with the Registrar of Foundations in The Bahamas and must have an initial endowment of assets valued at least US$10,000 or the equivalent in another currency.

LOOK AGAIN

Over the years, The Bahamas has continued to adapt, and re-adapt, its wealth management offerings, wherever possible, so as to keep abreast of changing trends in the financial services and wealth management landscape. Doing so has enabled its trust and foundation offerings, which are undoubtedly progressive and easily tailored to clients' needs, to take pride of place in the competitive IFC arena.

When considering options for international wealth planning, the Bahamian trust and foundation deserve heightened consideration.

 

Kamala Richardson is an Associate in the Private Client & Wealth Management practice group at Higgs & Johnson