Bahamian Trusts and Foundations – The Facts
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 in the past two years as international financial centres or IFCs have had to adjust at almost break-neck speed to the diktats of the Organisation for Economic Co-operation and Development and the European Union, which call for the substantiation of ‘economic presence,’ the removal of preferential tax regimes and for more and more disclosures of all kinds to the tax authorities by corporate entities. On the whole, IFCs have responded by passing laws to require corporate entities to have ‘economic substance’ on their soil, to remove any preferential tax breaks that entities owned by non-residents may receive and to create registers that divulge the beneficial ownership of those entities.
The Bahamas’ compliance came, towards the end of 2018, in the form of the Commercial Entities (Substance Requirements) Act, the Removal of Preferential Exemptions Act and the Register of Beneficial Ownership Act. As a result of more and more regulation, the detractors of IFCs have called the usefulness of corporate entities in private wealth management into question. 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 vital player in the international financial and wealth management markets.
The Bahamian trust is a long-standing fixture in the international wealth management market and is a favourite amongst trust practitioners the world over because it protects assets well. The jurisdiction has always observed trust law because its legal system is deeply rooted in the ancient common law of England. In modern times, however, its Government has supplanted much of the old English law by innovative statutory reform. The Trustee Act 1998 is the epitome of that reform and provides the cornerstone of Bahamian trust legislation. Although it is derived from the English Trustee Act 1925, it has taken on a life of its own.
One innovative feature of the Trustee Act is that it displaces 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. It also 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 the light of the English High Court’s recent decision in the case of JSC Mezhdunarodny Promishlenniy Bank v Pugachev 2 , in which it declared that certain trusts governed by New Zealand law were illusory because the economic settlor, Mr Pugachev, was deemed not to have divested himself of his beneficial interests in the trusts’ assets – or, to put it another way, the trusts were a part of a sham which was intended to conceal his control of the assets settled in them.
A key factor in the court’s ruling was that the terms of the trusts reserved extensive powers to the protector, who was none other than Mr Pugachev himself, and that these powers included the right 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 cannot be invalidated by reason of such powers being reserved to the settlor. It is therefore unlikely that the English court would have arrived at the same conclusion – and practically impossible that a Bahamian court would have done – if the trusts in the Pugachev case had been governed by Bahamian law.
The Bahamian Government made its most recent amendments to the Trustee Act in 2016 with the aim of re-asserting the rule in Re Hastings-Bass  which was eroded by a decision in 2013 in the conjoined appeals of Pitt v Holt and Futter v Futter. The rule in Re Hastings-Bass allowed trustees to apply to a 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 v Holt and Futter v 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 those beneficiaries to do so. The amendments to the Trustee Act in 2016 have removed these conditions where a trust governed by Bahamian law is concerned, thereby preserving a useful means by which trustees can ‘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. One notable piece, the Fraudulent Dispositions Act 1991, forms the crux of the Bahamian asset protection regime. This Act limits the time and the circumstances in which the creditor of a settlor may claim against the assets of a trust. 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 make their claims – otherwise, their claims are statute-barred. Although other IFCs such as Anguilla, Bermuda and the Cayman Islands have similar fraudulent disposition legislation, the limitation period in the Bahamas (2 years) is significantly shorter, with Bermuda’s and the Cayman Islands’ limitation periods being 6 years and Anguilla’s being 3 years. A person who embarks on a speculative business venture may therefore take advantage of this and insulate his assets from creditors ahead of time in case the venture fails.
The Trusts (Choice of Governing Law) Act 1989 also protects the assets of Bahamian trusts. 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 that rest on matrimonial or forced-heirship claims made against the settlor or a beneficiary of a trust. A Bahamian court cannot let any person, including the spouse of a settlor or the beneficiary of a Bahamian trust, attack the assets settled in that trust through the courts of a foreign jurisdiction.
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, when a trust is a component in a commercial structure, it is afforded the same potential to exist in perpetuity as a company in that structure.
Re-discovering the foundation
The foundation is a relatively new addition to The Bahamas’ wealth management arsenal. Although Bahamian practitioners have never been strangers to foundations, these structures were only formally introduced into Bahamian law by the Foundations Act 2004. The foundation is originally a creature of civil law, with similarities to both a trust and a company. Under Bahamian law, for example, foundations may have beneficiaries (as do trusts) and are separate legal entities capable of holding assets and being sued in their own names (as are companies). The dualistic nature of the foundation therefore makes it an apt choice for a stand-alone entity that might hold and administer wealth for the benefit of a family, or for a component of an international estate plan. In this latter capacity, it can be 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. its charter and/or articles). It may engage in commercial activities such as the buying and selling of further assets as long as those activities are incidental or ancillary to its main purposes. In the context of familial wealth management, 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. In order to ensure that it has assets to do this, it may trade its assets to produce the necessary flows of income. In a large commercial structure, it may be used as a holding vehicle for the shares of one or more companies.
The governance of a foundation can look very much like that of a company, with officers appointed to make decisions for it and to undertake its day-to-day management, much like company directors. In the event of no officers being appointed, a foundation council or some other similar body governs it. In addition, the founder of a foundation may reserve powers to himself in a manner similar to the reservation of powers permitted for Bahamian trusts. These powers might allow him to appoint and remove officers or foundation council members, or to veto distributions of the foundation’s assets. Every foundation in The Bahamas has to be registered with the Registrar of Foundations and must have an initial endowment of assets valued at least US$10,000 or its equivalent in another currency.
Over the years, The Bahamas have continued to adapt, and re-adapt, their wealth management offerings wherever possible, keeping abreast of trends in financial services and wealth management. In doing so, the jurisdiction has placed its trust and foundation offerings, which are undoubtedly progressive and easily tailored to clients’ needs, in pride of place in the competitive world of IFCs.
About the Author
Kamala Richardson is an associate in the firm’s Private Client & Wealth Management practice group and specializes in wills, estate planning and matters related to trust law, foundations and company law.
*Article first published in Wealth Briefing Report – Clearview Financial Media Ltd., April 2019
The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases.Copyright ©2019 Higgs & Johnson. All rights reserved.