Bahamas - Family, Asset Protection, and Purpose Trusts

THE TRUST CONCEPT 

Trusts are being used more and more today to protect the assets of professional against potential mal-practice suits and creditor actions.

1.	The trust concept was originated by the Courts of Equity in the United Kingdom some 400 years ago and was subsequently recognized by Common Law Courts. The law governing trusts in The Bahamas are generally similar to those in the United Kingdom and other English speaking countries.
2.	A Bahamian trust may be established by residents of any country in the world. The person setting up the trust is generally called the Settlor and when established by living persons to living persons the trust is called an inter vivos trust. The document establishing the trust is known as a Settlement Deed or Deed of Trust in the case of an inter vivos trust and a Declaration of Trust when the Settlor himself acts as trustee. The document specifics the property which is to be placed in trust, the way in which the trust funds are to be invested and administered, whether the income is to be accumulated, to whom the income is to be paid, how long the trust is to continue to continue and to whom the trust property will ultimately be disturbed.
3.	Deeds of Trust can be extremely flexible and an inter vivos trust can be either revocable or irrevocable. In other words, the Settlor can decide whether to retain or to surrender the powers to amend or revoke the trust. The trust may provide wide discretionary investment powers and the trust property is not subject to restrictions on the accumulation of income. Trust property held by the trustee may be lodged in The Bahamas or in most parts of the world. No application to any court is required to pay Beneficiaries, and generally the law of the individual country of residence is not applicable to payments to them.
4.	Although a trust cannot be established in perpetuity, the laws of The Bahamas governing the duration of trust are such that they enable them to last for several generations. The administration of trusts in The Bahamas is completely confidential.

ADVANTAGES OF TRUSTS

1.	Continuity: The Settlor can be confident that his assets will be protected and be administered in accordance with his wishes, not only during his life but thereafter. It can often take the place of a Will.
2.	Anonymity: Once the assets are transferred to the trustee, they become registered in the trustee’s name, and no reference is made to the Settlor or the beneficiaries.
3.	Taxation: If the trust is discretionary and is in one of the recognized tax havens, because the beneficiaries do not have specified interests in the trust assets on which they can be taxed, there will often be freedom from income or capital taxes.
4.	Exchange Control: If based in a suitable tax haven, the trust will not be subject to any exchange control restrictions.
5.	Family Companies: Trusts can be used to cover the situation where several family members of a family have shareholdings in the same company or group of companies. If all the shareholdings are placed into one trust, with appropriate provisions, this can ensure that the ownership of these shares does not pass out of the family on the death of one of the participants.

ASSET PROTECTION TRUSTS

1.	The usual offshore trust as you are probably aware is a wonderful tool for reducing U.S. gift or estate taxes. However, the asset protection trust (APT) incorporates those tax benefits while at the same time preserving a client’s asset against unknown future creditor problems. If the client has a creditor problem or is in a lawsuit when he seeks to establish the APT, then the APT may not be legitimate.
2.	The APT is most important to professionals today. Doctors, nurses, lawyers, accountants, engineers, architects, contractors, and others have witnessed the award of high amounts in mal-practice lawsuits by the courts. Many practitioners have been virtually reduced to financial ruin thereby. At the same time, they have witnessed a staggering increase in professional indemnity insurance premiums, while insurers have taken steps to qualify and limit as much as possible the professional indemnity risks which they are prepared to cover. In the aftermath of these events, the APT is designed to prevent those assets which are placed in trust from being attacked in the event a mal-practice suit is successful against the professional. It insures that the family is not protected against such unforeseen circumstances.
3.	The essence of asset protection is that the APT is domiciled in a jurisdiction whose laws will benefit the offshore trust. This will help to ensure that the assets settled upon the trust will be governed by a more benign law than the pertaining in the original jurisdiction. The laws of The Bahamas facilitate such a trust.
4.	Trust instruments commonly refer to three distinct persons or groups of persons being the Settlor (Grantor), the Trustee and the Beneficiaries (Grantees). Thus the classic trust arrangement is one whereby the Settlor transfers legal title to property to one or more Trustees, who then hold the property for the benefit of one or more Beneficiaries. It is now the practice for offshore trust instruments to refer to a fourth person commonly known as the Protector. He is a person who, subject to the provision of the trust instrument, performs advisory or consulting services ranging from acting as an intermediary between the Settlor or the Beneficiaries on the one hand, and the Trustees on the other hand.
5.	The APT will have a Settlor, a Trustee, Beneficiaries and a Protector if necessary. Usually, it is quite common for the APT to be established on a tax-neutral basis. That is to say, tax-paid assets are transferred to an entity to establish the APT which will be located in a low or no-tax jurisdiction. There are no estate, gift or income taxes in The Bahamas.

STANDARD DEED OF TRUST 

A standard deed of trust to establish an Asset Protection Trust recites the name of the Trustee and the Settlor, the name of the Trust, the assets being placed in trust initially, the Trusts upon which the assets will be held, the powers and duties of the Trustee, provisions for a Successor Trustee, a change of the forum for administration of the Trust Assets, the remuneration of the Trustee, the interest and the names of the Beneficiaries, and the governing law. 

The Deed can be modified to accommodate a Protector when deemed necessary. 

The Deed also provides for the Trustee to have regard to the wishes and suggestions of the Settlor. Since the Trustee is to act solely at its discretion, any letter setting forth the wishes of the Settlor is of no legal effect as far as the Trustee is concerned. However, in practice the letter provides guidelines for the Trustee and the Trustee usually adopts these guidelines. In some instances, the Trustee gives an undertaking to the Settlor outside the Trust Deed that in the exercise of its discretion in dealing with the Trust Assets, it will implement the Settlor’s wishes. 

The Deed may be drafted, if the Settlor wishes, to ensure that the Trustee acts solely upon the directions of the Settlor during his lifetime.

Although for taxation reasons, it is normally preferable to use an irrevocable trust nonetheless, the trustee usually power at its discretion to advance capital of the trust and, if it is decided for any reasons to bring the trust to an end, the Settlor could ask the Trustee to exercise its discretion to pay out all the capital of the trust.

PURPOSE TRUSTS 

By The Purpose Trusts Act 2004 (“The Act”), The Bahamas introduced purpose trusts for special purposes. These trusts have many estate planning and commercial uses including:

•	The holding of shares of a private trust company. In this structure the settlor and members of his family and his advisors may be appointed directors of the private trust company and thereby assume some responsibility for the management of the trust. This is often useful when the assets of the trust are of an unusual nature.
•	A trust which has both philanthropic and charitable purposes.
•	Asset purchase or financing transactions to provide security for an entity which finances the purchase of an asset and corresponding liability with the intent to keep the asset from appearing on the purchaser’s balance sheet.
•	Separating voting from economic control.

The trust benefits are for a purpose rather than for persons or entities, and there is no one to whom beneficial entitlement in the trust property is vested.

This post is for your information only and nothing contained in this post is intended to constitute a legal opinion.  If you require any detailed advice you can contact a Bahamian trust and estate planning attorney by clicking here.