Offshore trust funds are an excellent addition to your asset protection or wealth management strategies. Most offshore trust jurisdictions provide modern trust legislation that offers better benefits to settlors and beneficiaries than many domestic options.
Understanding the distinctive advantages of offshore trusts in the Bahamas is the first step to understanding if they might work with your particular financial situation and goals.
What Is a Bahamian Trust?
A trust is a mechanism that separates the legal ownership of an asset from the rights and benefits associated with that asset. During the creation of a trust, one person (the settlor or trustor) gives another person, the trustee, the right to hold the title to a property or assets for the benefit of a third party (the beneficiary). Trust assets can include almost any asset, including investment portfolios, physical property, bonds and stock certificates, cryptocurrency, mutual funds, and bank accounts.
Offshore trusts add an extra layer of protection by defending your assets from the reach of domestic courts and government agencies in the United States. The Bahamian government has several offshore trust-friendly regulations that allow non-nationals to establish an asset protection trust easily and safely, making it an appealing option for individuals looking to establish a trust.
The Benefits of a Bahamian Trust
Officially known as the Commonwealth of the Bahamas, this group of over 700 islands and islets in the Atlantic Ocean uses English law as the basis of its legal system. However, Bahamian law has made several changes to its trust regulations, allowing non-resident individuals to establish trusts for non-resident beneficiaries, with several other notable advantages. These include:
- No local taxes on the trust property or for beneficiaries (though this does not exempt individuals from local income tax in their region)
- A provision that non-residents can create trusts for the benefit of non-Bahamian beneficiaries
- No expiration date — all Bahamian trusts are perpetual
- Expert local trust companies and financial services that result in speedy trust creation
- Protection of the trust (by Bahamas legislation such as the 1991 Fraudulent Dispositions Act and others) from forced heirship claims, forced heirship laws, creditors, foreign judgments, and seizures
- English as the official language
- Privacy, as Bahamian law does not require the settlor or beneficiaries to disclose their information on public records
- Short statute of limitations against asset protection trust disputes — any action against a settlor by a creditor must start within two years of the asset transfer into the trust instrument.
Since 2018, all companies doing business in The Bahamas must provide beneficial ownership information to their registered agents.
Types of Trusts and Trust Assets
While most trusts have several features in common, their purposes can vary dramatically — from trusts established to pursue charitable purposes to creditor protection trusts or trusts as part of a larger estate and wealth management strategy. Choosing the right trust from the outset ensures that you will be able to achieve your goals effectively.
Asset Protection Trusts
Asset protection trusts protect assets by placing them out of the reach of potential creditors. Individuals with high-risk occupations may be the subject of frivolous lawsuits or liability, and having an APT in the Bahamas can ensure your peace of mind.
What makes Bahamian trusts so appealing as asset protection trusts is the Fraudulent Dispositions Act of 1991, which protects all assets in trusts from foreign criminal or civil judgments. Creditors must open a case within the Bahamas, and the two-year statute of limitations means that any filings must occur within two years of the settlor placing the asset within the trust.
Bahamas trusts also have significant protections for settlors and beneficiaries. The Trust Act of 1989 establishes the role of a “protector of trusts” who acts as an intermediary between the trustee and the settlor. The settlor can appoint a protector by adding a provision in the trust deed, granting the protector the powers to:
- Appoint and remove trustees
- Remove and appoint beneficiaries
- Receive information regarding the trust and its activities
- Instruct the trustee with regards to trust fund investments and disbursements
Settlors often choose financial advisors or confidants to act as protectors of the trust, but they can also choose specialized companies that offer the service.
The Bahamas established the Purpose Trust Act of 2004 to govern all non-charitable trusts in the region. Purpose trusts can hold assets without having a beneficiary or may exist explicitly to create wealth for descendants and family members. During the creation of a purpose trust, the settlor must establish the purpose of the trust, which must involve non-charitable purposes while not involving illegal activities or contravening public policy.
The two most common types of purpose trusts are discretionary and fixed trusts. Discretionary trusts give trustees significantly more leeway in trust disbursement. All capital asset and income distribution occur at the trustee’s discretion, allowing for the shielding of assets from potential beneficiary misuse.
Fixed trusts contain a trust deed where the settlor explicitly outlines the distribution of trust property and assets in the trust instrument. Trustees in fixed trusts have some discretion in how they manage assets to the maximum benefit of the trust but have no say in how or when beneficiaries receive their disbursement.
According to the Purpose Trust Act, purpose trusts must name an authorized applicant in the trust instrument who will enforce the purpose trust and represent it in any court proceedings. If the trust’s purpose is to make a profit, the trust must also appoint one trustee who is either:
- An attorney
- Licensed banks and trust companies
- Approved by the Minister under the Purpose Trust Act.
A charitable trust holds assets and securities for charitable purposes. In the Bahamas, charitable trusts are subject to general trust civil law, while charitable foundations must comply with regulations set by the Foundations Act.
The Bahamian Trust Structure
Trusts in the Bahamas have a similar structure to most domestic trusts in the United States, which include a settlor, trustees, and beneficiaries. One notable difference is that the Trustee Act allows the Bahamian settlor to appoint a protector in the trust instruments who acts as a mediator between the settlor and the trustee.
The settlor is the individual or company that establishes the trust and divests themselves of legal ownership and control of trust assets. Under Bahamian governing law, settlors retain several powers, such as:
- The power to remove or appoint trustees, protectors, and beneficiaries
- The power to direct the trustee in how they exercise their powers and discretions
- Powers of amendment
The settlor appoints a trustee, which may be an individual or company, to become the legal owner of the trust assets. The trustee holds and manages trust assets and must act with reasonable care and skill in the best interests of the trust.
Many trusts in the Bahamas use a private trust company, explicitly created by the settlor to be a trustee. The trust holds the company’s shares and allows the settlor and beneficiaries significant control over the trust. PTCs in the Bahamas are strictly regulated and must conform to the guidelines set out by the Banks and Trust Companies Regulation (Amendment) Act of 2006.
Beneficiaries are individuals or groups that benefit from the trust. These benefits usually involve deriving income from the trust that is exempt from gift, capital gains, or estate taxes. These persons or organizations also receive the assets within the trust when it vests or expires.
How To Set Up and Register a Trust in the Bahamas
In some cases, settlors can set up an offshore trust in the Bahamas within a day. The process requires nominating a trustee and beneficiaries and the potential for appointing a trust protector. As a well-known financial center, the Bahamas contains many branches of subsidiary operations of major institutions that offer the necessary financial services to set up and maintain a trust.
How Much Does It Cost To Set Up a Bahamian Trust?
When establishing any offshore trust, there are several fees associated with creating and maintaining the trust. These fees include a trustee fee, a protector fee, legal fees, investment and banking fees, as well as tax reporting fees. The standard fee to establish an offshore trust usually ranges between $25,000 and $50,000. In addition, annual fees usually range between $5,000 and $15,000.
The Trustee Act of 1998 establishes that non-resident trusts must pay a trust duty of $50 on the creation of a trust. Failure to pay this duty results in an annual $100 fine.
If the trust contains Bahamian real estate, the country will also charge stamp duty on an ad valorem basis for the conveyancing of the property.
Perpetuity Period of a Bahamian Asset Protection Trust
The 2011 Rule Against Perpetuities (Abolition) Act removed the requirement for trusts to have an expiry period. While settlors may still set a vestment date, trusts may also exist perpetually, allowing them to provide wealth management provisions for multiple generations.
Bahamas Trust Act and Trustee Act
Trust law in the Bahamas traces its roots to the Bahamian Trustee Act of 1893. The 1989 Trust Act established the Bahamas’ independence from foreign jurisdictions and added the provision for the appointment of a protector of trusts.
The laws surrounding trusts have continued to develop, with the establishment of the 1998 Trustee Act and subsequent amendments in 2007, 2011, 2013, and 2016.
Trust Taxes in the Bahamas
Trust legislation such as the Trustee Act of 1998 ensures that all offshore trusts are tax-free and exempt from income, capital gains, corporate, inheritance, gift, and estate taxes. However, recipients of trust income or assets must still report this to their local government.
Comparing Bahamian Trusts to Other Offshore Options
Investors use the Islands of St. Kitts and Nevis primarily as locations to establish limited liability corporations (LLCs) to protect assets or as wealth management vehicles. However, despite this focus on LLC development, Nevis trusts are a popular option for establishing offshore asset protection trusts.
The Cook Islands are the leaders in offshore trusts, having established modern trust law in the 1980s and 1990s. The jurisdiction offers excellent asset protection legislation with a one-year statute of limitations on fraudulent transfers. However, the distance from the United States makes some settlors reluctant to select this jurisdiction.
Belize trusts offer many of the same advantages as trusts in the Bahamas, such as:
- Aggressive asset protection laws, including protection from foreign judgements and no consideration for foreign claims of fraudulent conveyance
- A streamlined trust formation process
Belize also offers lower jurisdictional risk due to its larger population and stronger economy than many of its counterparts.
The Cayman Islands
Known as one of the world’s principal offshore jurisdictions, the Cayman Islands are a haven for investment funds and trusts. Trusts in the Cayman Islands offer settlors and their family members significant control of the trust’s management.
Who Is the Bahamian Trust Best For?
Offshore trusts are excellent asset defense mechanisms for high-net-worth individuals or those in high-liability careers. They are also useful in wealth management strategies or in reducing tax burdens via charitable trusts. Common candidates for offshore trusts include board members, business owners, healthcare professionals, and traditional and cryptocurrency investors.
For further guidance on offshore trusts and to find out if they’re the right choice for your situation and goals, contact our Offshore Asset Protection legal team at Blake Harris Law today.