Reasons to Establish a Bahamian Trust

Rhonda L.C. Hull

Paper delivered at Real Estate Conference in Haparanda, Sweden

March 31^st, 2009 

• The Mother of a pregnant teenager who committed suicide sues the Georgia School District because a Counsellor allegedly gave her daughter poor advice.
• A doctor stopped to assist three victims of a traffic accident.  One of the victims did not survive.  Two years later, a judgment of $11m was entered against the doctor.  Her liability insurance only covered her for $1m.  She ended up declaring bankruptcy and losing everything.
• Convicted and jailed child molester John Taylor Booz sued his victims through the Colorado courts for $2m claiming he had suffered humiliation, anxiety and loss of health.

Sometimes it seems as if the World has turned upside down.  Admittedly, the above cases are extremes, but there is no doubt that we are all becoming increasingly vulnerable to irresponsible and random litigation.

People have a real and fundamental need to protect themselves and their possessions against risk.  We do this in a multitude of different ways:

• We protect our domestic possessions from theft by securing our house;
• We protect our house against fire by insurance;
• We protect ourselves against inflation risk by purchasing real estate;
• We protect ourselves against exchange risk using currency options.

As society has evolved, the risks we face have changed; therefore, so have the techniques we use to protect ourselves.  Now we face the new risk of litigation.  In the Bahamas, we believe we can help find a solution to protect ourselves against this new risk of litigation.  One of the ways we can do this is by putting our assets into a Bahamian Trust. 

What is a Trust?

The Common Law Trust is an ancient device whereby a person (the settlor) transfers ownership of assets to a trusted party who acts as a trustee.  A trust deed is really a form of contract (which in certain circumstances can even be an oral contract) which stipulates the conditions on which the trustee owns the assets, e.g. the period of time that he will own the assets, what he is to do with the assets and the income from the assets, what he is to do when certain persons die, etc. 

The basic idea behind the original trust concept was that the trustee would look after the assets while the settlor was away or preoccupied with other matters.  The settlor would be secure in the knowledge that his assets would be properly maintained and safe from third parties who might wish to attack or acquire them.

The modern use of trusts is almost identical in concept – it is just that we have some new risks to cope with.  In particular, the increasing aggression seen in the court system in recent years has precipitated the development of more sophisticated and watertight refinements on the original trust concept.  Among these developments has been the introduction of new legislation in a number of jurisdictions which specifically assists in defending assets against such aggressive litigation.

A trust is constituted by a written document known as the trust deed.  This may normally be drafted to meet the wishes and requirements of the person creating the trust and may be revocable or irrevocable, discretionary or non-discretionary.  Essentially, a trust allows a person to divest himself of assets by giving them to a trustee to hold for the benefit of any number of persons, including himself, charities or other entities, known as beneficiaries.  These beneficiaries may include people not yet born.  There may be provisions for other beneficiaries to be added at a later date. 

Other reasons to Create A Trust?

Some other reasons a person may wish to create a Bahamian trust include:

• To avoid testamentary problems and disclosure during probate where bank accounts, investments and other assets are held in countries outside of a client’s home country.  A trust does not die.  Therefore, by placing ownership of assets in a trust during one’s lifetime, a client can determine how and to whom these assets are to pass upon his death without the necessity of creating wills in foreign jurisdictions and without the public disclosure surrounding probate;

• To avoid or reduce taxation either in relation to income or assets generally or in regard to specific assets.  As an example of the latter, inventors or other entrepreneurs may find it particularly advantageous to place some of their shares in developing companies into a Bahamian trust in such a way that capital gains tax can be minimized on a later disposition of those shares if the company is successful and goes public or is acquired by a larger corporation;

• To avoid death duties in the country of residence and foreign countries where assets are held;

• To protect foreign assets from sequestration, enforced repatriation or loss of freedom of choice if restrictions on foreign currency transactions are introduced in the client’s home country;

• To provide for foreign assets to pass to chosen heirs and in the proportion which may not be as provided under the inheritance rules applying in respect of testamentary dispositions in the client’s home country.  In this respect, the Bahamas has enacted the Choice of Governing Law Act, which provides additional safeguards not found in most other offshore financial centres for persons from countries where such inheritance laws exist.

Why Use a Bahamian Trust

The Bahamas has two important pieces of legislation which make a Bahamian trust a much more secure and practical vehicle than an “onshore” trust.  By onshore, I mean “a trust created in your home jurisdiction”.  Without getting too much into the legal aspects of this, essentially the two laws are as follows:

1. The Choice of Governing Law Act

This Act provides that notwithstanding the domicile of the settlor, the beneficiaries, the assets or anything else, only the law specified in the trust document itself will apply to the trust.  This sounds obvious but this law was enacted in the Bahamas specifically to avoid situations such as what occurred several years ago when an American judge decided to impose Venezuelan law on a Florida trust. 

This Act also provides additional safeguards for foreign assets to pass to chosen heirs and in the proportion which the Settlor wishes which may not be as provided under the inheritance rules in the Settlor’s home country.  These additional safeguards in this Act are not found in most other offshore financial centres. 

1. The Fraudulent Dispositions Act

This Act has two important provisions:

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  1. As long as the settlor is not involved in litigation at the time he creates the trust and as long as he avoids any judgments against him for the first two years of the trust, then the trust assets are protected against any future claims arising thereafter.
  2. This law specifically states that it is incumbent upon the creditor to prove that the transfer of assets to the trust was made in fraudulent circumstances.  In other words, the burden of proof is put upon the creditor to show that he has been intentionally defrauded .

The whole idea of a trust structure is to help minimize risk.  Therefore, it is obviously much better to set up your trust in a jurisdiction where the law is designed to make sure such structures will work.   

What Will It Cost?

The initial costs to set up a trust will obviously vary depending upon the complexity of the trust.  Usually an attorney in the client’s home jurisdiction will draft the trust and handle the estate planning issues for the client in totality.  A Bahamian attorney will then review the document to ensure that it complies with Bahamian laws.  The initial fees are approximately $5,000.00 - $10,000.00.  There are also trustee fees, which usually involve a small acceptance fee and an annual fee.  The annual fee can be up to 1% of the total value of the assets in the trust.  Realistically, it is probably not worth going through all of this for much less than $1m worth of assets which should probably represent no more than 30 – 40% of a person’s total estate. 

If this sounds expensive, think of it in terms of buying peace of mind – in these days of uncertainty, a valuable commodity!  Best of all, having a trust in the Bahamas gives you a good excuse to come and visit us on a regular basis!  Sounds like a good idea to me!