A trust is a unique legal relationship whereby the settlor of the trust transfers legal ownership of defined assets to the trustee, who then holds those assets as trust property to be administered for the benefit of the beneficiaries of the trust in accordance with the provisions of the trust instrument. In contrast to the vesting of legal ownership in the trustee, the beneficiaries are granted equitable ownership of the trust property. This division of ownership between the trustee and the beneficiaries allows the trustee to deal with property as legal owner and the beneficiaries to enjoy the benefits of the trust property in the manner detailed by the settlor in the trust instrument.
Bahamian law recognizes trusts; both in legislation and case law. This engenders The Bahamas’ continued commitment to strengthening its trusts regime and cementing its status as a leading international financial centre.
What is an Authorised Purpose Trust?
In a marked departure from traditional principles of trusts law as espoused by the English Courts of Chancery, The Bahamas permits non-charitable purpose trusts by virtue of the Purpose Trust Act, 2004 (the “Act”). Traditionally, trusts had to have named beneficiaries or classes of beneficiaries or if established to fill a purpose, they could only be established for charitable purposes or a limited class of historically permitted purposes. Charitable purposes were limited to the relief of poverty, the advancement of religion, the advancement of education or some other purpose beneficial to the community. If a trust was established for a purpose that was not charitable, historical limitations on such purposes dictated that the trust could only be established for the purposes of maintaining or building monuments, the care of a specific animal or the promotion of fox hunting and a few others. Under the Act, purpose trusts are free of these constraints.
The only limitations placed on purpose trusts under the Act are that:
- the purpose must be possible and sufficiently certain to allow the trust to be carried out;
- the purpose must not be contrary to public policy or unlawful under the laws of The Bahamas;
- the trust instrument specifies the event upon the happening of which the trust terminates and provides for the disposition of surplus assets of the trust upon its termination.
As such, the changes ushered in by the Act allow for the creation of trusts to fulfil purely fiscal purposes, such as the holding and investment of securities (e.g. shares in a company) or other assets. However, an authorised purpose trust may not hold land or an interest in land in The Bahamas directly or indirectly but it may lease office premises for the purpose of its business.
Additionally purpose trusts may be created over the capital or income of any property and may have fixed interests, discretionary interests, or a combination of both. The capital or income of the authorised purpose trust can be disposed of in any of the following ways:
- to persons who may be of any number (The Act does not preclude purpose trusts from having human beneficiaries, although such trusts must have the fulfillment of a purpose as its leading objective);
- for purposes which may be of any number or kind, charitable or non-charitable; or
- to any combination of persons or purposes aforementioned.
Purpose Trusts are subject to the Trustee Act, 1998 and general equitable principles of law if the Act is silent in any respect.
A purpose trust established under the Act is enforced by an “authorised applicant” who is vested with the following rights:
- standing to make application by originating summons to the court in respect of the allocation of income and capital amongst the different purposes of the trust.
- standing to apply to the court to resolve an uncertainty as to the administration of the trust.
- standing to apply to the court to reform the trust cy-près.
- the same rights inter alia as beneficiaries of an ordinary trust to bring and prosecute administration proceedings and proceedings for the recovery of trust property.
- the right to such accounts and inquiries and such other personal and proprietary remedies and relief, for the benefit of the trust, as could be obtained by a beneficiary of an ordinary trust.
- standing to apply to the court for an opinion, advice or direction in connection with the trust.
- in addition to rights specifically conferred in the trust instrument, the right to inspect and make copies of the instruments, registers and documents of the trust kept by the trustee, all other records and documents of the trust, and the opinions and legal advice of counsel in the general administration of the trust.
- the same rights to information and access to documents as the authorised applicant would have if the authorised applicant were a beneficiary with a vested interest under the trust.
Advantages of Purpose Trusts
A purpose trust enables greater flexibility with regard to the objects of the trust. It allows the objects of the trust to be individuals and corporations, purposes, or both. There may be any number of beneficiaries and any number of authorised purposes, whether charitable or not, provided that the purpose(s) of the purpose trust meets the requirements specified in the Act. If the trust instrument of a purpose trust has more than one authorised purpose, it may provide for the trustee to have absolute discretion to allocate capital and income among the different purposes or objects of the trust, and to devise and determine the methods to be used to pursue the purposes of the trust.
Uncertainty of the Trust
A purpose trust is never rendered void by uncertainty as to the administration of the purpose trust as may befall a traditional trust. Any uncertainty as to the administration of the purpose trust may be resolved by the trustee or any other person the trust instrument so specifies. If the trustee or the other person fails to resolve the uncertainty, the Court may resolve it using the doctrine of cy-pres to reform the terms of the trust.
The Bahamas has no income, capital, or estate taxes. Therefore, the trustees and the trust planner, in establishing a Bahamian purpose trust, do not need to take any form of local taxation into account.
The Act provides for authorised applicants, who enforce the trust, rather than the beneficiaries. Authorised applicants are individuals appointed as such under the terms of the trust instrument, or persons appointed by the court. Authorised applicants have the standing to enforce the terms of the trust by making certain applications to the court, which include administrative proceedings, proceedings for the breach of trust, and also rights to information.
Individuals who are beneficiaries of a purpose trust or who may benefit indirectly from a purpose trust are not authorised applicants unless they are named or appointed. In effect, there is a clear distinction between the ability to benefit from the trust and the actual ability to enforce the terms of the trust.
A frequent use of a purpose trust is in the commercial trust context, where the separation of legal ownership from control is often employed. For example, the Act enables a purpose trust to be created to own shares and other interests in a company, whilst the day-to-day governance of the company in hands of the directors. What this does is allow the trustee to mitigate the assumed risk of owning shares in companies which it does not manage, or is perhaps not capable of managing due to the nature of the business involved.
A settlor may wish to create a purpose trust vehicle which allows him to own the shares of companies, leaving the trustee free from any potential liability that may arise from the trustee holding those shares itself. Purpose Trusts may be also used for the purpose of owning special purpose vehicles in securitisation transactions and the ownership of founder shares of investment funds.
Reformation – Cy Pres
The Act empowers the trustees or any other person to reform the purpose trust or to make a cy-pres application to the court in the event that it becomes in whole or in part:
- impossible or impracticable;
- unlawful or contrary to public policy; or
- obsolete in that, by reason of changed circumstances it fails to achieve the general intent of the purpose trust.
Further Uses of Purpose Trusts
The purpose trust has been a popular trust vehicle in recent years and has numerous estate planning and commercial uses, such as:
- Acting as a vehicle to hold shares of a Private Trust Company
- Creating a trust which has both philanthropic and charitable purposes
- Asset purchase or financing transactions to provide security for an entity which finances the purchase or to keep the asset and corresponding liability from appearing on a purchaser’s balance sheet
- Creating dynasty-style trusts for multiple generations in the family for the purpose of holding treasured family assets, investments, and/or preserving shares in family-owned businesses
- Creating trusts which benefit individuals or corporations while at the same time achieving additional objectives such as the continuation of a professional business
- Forming “Special Purpose Vehicles” for a wide range of commercial transactions in a safe, flexible, and bankruptcy remote manner
- Separating voting from economic control
- Creating trusts that are formed for the purpose of liquidating particular assets and distributing the assets transferred to it
- Creating an escrow trust for the purpose of holding funds from a purchaser in escrow for the seller
- Holding a single asset, such as a valuable piece of artwork, or an airplane
- Forming mutual funds as unit trusts, where hedge fund managers wish to eliminate any obligation to attend meetings of the companies in whose securities they invest
- As a part of orphan structures in bond issues where the trustees wish to divorce themselves from supervising the issuing vehicle
Requirements of Purpose Trusts
A purpose trust must satisfy the following requirements:
- the purpose must be possible and sufficiently certain to allow the purpose trust to be carried out;
- the purpose must not be contrary to public policy or unlawful under the laws of The Bahamas; and
- the trust instrument must specify the event upon the happening of which the purpose trust terminates, and provide for the disposition of surplus assets of the purpose trust upon its termination.
Qualifications of Trustees
A trustee of a purpose trust who carries out trust business in The Bahamas must be either a licensed bank or trust company or an individual who is licensed as a financial and corporate service provider. However, where the trustee of a purpose trust does not carry out trust business in The Bahamas, no special qualifications are required.
Role of the Attorney General
The Attorney-General is empowered to make an application to the Court to enforce the purpose trust, produce documents relating to the purpose trust, or perform any activities that an authorised applicant is privileged to do in respect of a purpose trust, so long as the Attorney-General is unaware of any person who would be able or willing to pursue such an application or course of action. The Attorney General may also apply to the Court for the appointment of an authorised applicant in relation to the purpose trust and the Court may appoint a person who is able and willing to act as an authorised applicant. All trustees that administer a purpose trust must also permit the Attorney-General to make copies of the instruments, registers and documents relating to the purpose trust.
Regulations Specific to Purpose Trusts
The records that a trustee must keep in The Bahamas are the following:
- a copy of the trust instrument which created or evidenced each p of which he is a trustee, copies of amending and supplemental instruments and all other written instruments executed pursuant to any of them;
- a register of each such trust specifying in respect of each purpose trust, the name of the person who created the trust, a summary of the purpose or purposes of the purpose trust and the name and address of any authorised applicants named as such in the trust instrument; and
- such documents as are sufficient to show the true financial position of each such purpose trust at the end of the purpose trust’s financial year together with details of all applications of principal and income during that financial year.
Anti-Money Laundering Obligations
Trust companies and individuals who carry on trust business within The Bahamas are required to adhere to Bahamian anti-money laundering and counter terrorism legislation. For the purposes of this guide, Bahamian anti-money laundering and counter terrorism legislation which are most notable are:
- The Proceeds of Crime Act, 2018 (“POCA 2018”);
- Anti-Terrorism Act, 2018 (“ATA 2018”); and
- The Financial Transactions Reporting Act, 2018 (“FTRA 2018”).
The POCA 2018 prescribes the money laundering offences. The ATA 2018 prescribes the offences of terrorism, financing of terrorism and the proliferation of weapons of mass destruction. The FTRA 2018 imposes upon financial institutions and certain individuals who conduct trust business in The Bahamas specific duties with regard to (a) identification (b) record keeping and (c) internal reporting procedures. These duties exist irrespective of whether the trust company or individual accepts appointments to a new trust or administers an existing trust. Under the FTRA 2018, a trustee is required to take reasonable measures to determine the identity of: (i) the settlor of a trust, (ii) the beneficiaries or class of beneficiaries, (iii) the protector (if any), and (iv) any other person exercising effective control over the trust, which in the case of a purpose trust, could be the authorised applicant. In practical terms however, it may not be possible or feasible to verify the identities of classes of discretionary beneficiaries until such time as one or more of them obtains a vested interest under the trust. A trustee must disclose information to the appropriate supervisory authority if it knows or reasonably suspects that another person is engaged in money laundering. A trustee is given protection from criminal or civil liability for bona fide disclosure of information. Where a trustee is required to make a disclosure, it may be necessary to seek legal advice in order to understand the implications of the specific disclosure of information being made.
The purpose trust is a versatile tool with The Bahamas’ wealth planning tool kit which provides trust planners with increased flexibility in trust planning. It has proven to be a popular trust mechanism and is a progressive step forward in trust and estate planning.