A fresh round of changes to legislation affecting trusts in the Bahamas is to be warmly welcomed, says Caroline Garnham
WHY DO PEOPLE establish trusts? Trusts are established to provide for the frail, the young and the sick. These people, if beneficiaries, can benefit from the wealth in the trust without having the responsibility of its management and investment.
A trust is a legal obligation, created when an individual, the settlor, transfers wealth to trustees who hold it for the benefit of the beneficiaries, as named by the settlor in the Trust Deed. Trusts in practice leave succession in limbo. The settlor gives his wealth to his trustees for the benefit of his dependants, but not to his dependants outright to dissipate and invest as they choose.
Trusts as a legal obligation were invented by the British and therefore are recognised in many countries that comprised the British Empire. They are not, however, recognised in many countries that were part of the Napoleonic Empire, nor in many Muslim countries. In both the Napoleonic code and Sharia law, there are rules that dictate succession such that all dependants are provided for.
Trusts are therefore very attractive to many people, not only those who live in ‘common law’ countries but also to many residents of ‘civil law’ countries and many Muslims. Although many residents of civil countries and Muslims do not wish to deprive their dependants on their demise or to flout their law, they also feel very uncomfortable leaving the control and responsibility of their wealth — especially if it’s tied up in one asset, such as a family business — to dependants who they feel are unable to manage and invest wealth responsibly.
It was to enable these people to set up trusts that the offshore financial havens such as Jersey, Guernsey, Bahamas and Cayman Islands introduced a trust law to attract this business to their islands.
This business has grown exponentially and continues to evolve as major private banks, and others, set up trustee companies to meet this demand.
However, as many settlors grow older, many of the wealthier ones who see their wealth lasting several generations are concerned that although the private banks and trustee companies are good administrators, they are reluctant to have them take decisions about their family business and lifestyle of their dependants after they have gone. The first initiative to meet this concern was to reserve rights as to the appointment and removal of the trustee to someone the settlor trusts — a ‘protector’.
This person is often living in a high-tax jurisdiction so cannot be a trustee, and reserving to him these limited rights does not make him a trustee. However, this has not proved ideal. If the protector fails to appoint or remove a trustee and, as a result, the trust fund makes a loss, the protector could be personally liable for the loss. Most protectors are not prepared to take this risk.
THE SECOND INITIATIVE was to create a company in the offshore financial centre as a special purpose vehicle to act as trustee. This solution allows the settlor to decide who he wants to be directors of his private trustee company. These directors take decisions with regard to his dependants and business while enjoying the protection of limited liability, but the day-to-day administration can be contracted out to the former professional trust managers.
This solution has proved very popular, with only one drawback: who or what is to hold the shares in the private trustee company (PTC)? The most popular solution is a ‘purpose trust’. But the settlor is again faced with the conundrum of who should be the trustee of the purpose trust. The identity of this person is important because they decide who is responsible for hiring and firing the directors of the PTC, and it should be addressed very carefully when drafting the purpose of the trust. This is critical in a family dispute.
What is needed, instead of a purpose trust, is a perpetual entity, with no shares, no beneficiaries, no enforcer, no protector and no value (other than what it needs to carry out its executive duties and to hold the shares in the PTC).
I put this idea last year to the Bahamas Financial Services Commission, who, after considerable consultation, agreed to let me and my firm, LG, draft legislation to create such an entity. In February this year the Attorney General and the governor of the Central Bank of Bahamas publicly agreed to the legislation being put to their cabinet for consideration as soon as the Bahamas has signed 12 tax and information exchange acts and comes off the OECD’s grey list — which, at the time of writing, is imminent.
The new law will be known as the Bahamas Executive Entity (BEE) and is expected to be used in many trust-preservation structures not just to hold the shares in the PTC, but also as a corporate protector, enforcer or advisory board.
I wish to thank the Bahamas Financial Services Commission for encouraging innovation and enterprise, being so open to new ideas and letting us draft the new legislation.