BAHAMAS: An Introduction to Offshore: Trusts

Offshore Trusts in The Bahamas  

The Commonwealth of The Bahamas is enjoying slow steady growth in its GDP, fuelled by significant tourism inflows. Government debt equated to 83.4% of GDP at the end of December 2023, representing a significant improvement compared to the 100.4% of GDP at the end of June 2021.The Ministry of Tourism announced that there were 9,654, 838 visitors in 2023 – 1,719,980 by air and 7,934,858 by sea. These latter visitors will increase as more – and larger – cruise ships take advantage of the redeveloped enlarged Nassau Cruise Port. Major airlines have increased the number of scheduled flights, and some small airlines have begun to service some of the outlying islands. Luxury hotels at Bahamar and at Atlantis, Paradise Island, have very good occupancy rates and spending per room. An extensive range of luxury condos and villas is available for rent or purchase.

The Bahamas’ experience as a visitor and the ease of accessing The Bahamas by air (especially from North America), coupled with The Bahamas having no income tax (other than a 15% corporate income tax for multinational enterprises earning over EUR75 million annually, from the fiscal year 2024–25), no capital gains tax or inheritance tax and having many well-known banks and trust companies, have led to The Bahamas becoming a leading offshore trust jurisdiction. As such, it is used for the creation of trusts governed by flexible Bahamian trust law, for accepting foreign trusts being converted into more flexible Bahamian trusts, for the administration of trusts and for helpful recourse to its courts.

Normally, one thinks of a court as fulfilling a stern disciplinary role concerned, for example, with breaches of trust, but a court having jurisdiction over trusts also has a significant, paternalistic advisory role to enable the successful smooth running of a trust over a lengthy period. In the latter role, the court’s advice to the trustee as to the extent of the trustee’s powers and as to whether the proposed exercise of a power is within the proper scope of said power will protect the trustee if it is acting in accordance with the advice and has not misled the court.

It is very helpful that confidential, private arbitration of disputes with chosen specialist arbitrators has been possible since the Trustee (Amendment) Act 2011 if expressly provided for in the trust instrument by the settlor, despite the absence of the normally required binding agreement to arbitrate between all interested parties and the need for a court to provide representation for beneficiaries if they are minors, unborn, unascertained or lacking in mental capacity. In Volpi v Delanson Services Ltd and Volpi, Klein J on 28 December 2023 provided an extensive reserved judgment of 627 paragraphs investigating the limited extent to which recourse can be made to the courts to challenge an arbitration award under the 2011 Act and the Arbitration Act 2009.

Klein J confirmed the award, finding that there were no serious irregularities giving rise to substantial injustice, and holding that Section 91 of the 2009 Act excluded the ability to seek leave to appeal the award on questions of law: “The only route of appeal on points of law is the parties’ express opt-in by consent.” This needs to be at the outset, with a winning party being unlikely to risk losing if a point of law already decided in their favour is appealed.

As Volpi shows, very flexible trust structures can be created with a range of underlying companies or foundations. High net worth individuals generate much wealth and may seek to create a charitable trust for a favoured good cause, and to provide a dynastic wealth trust structure for their families over a specific period or indefinitely. However, the trustee or the head of the family from time to time may be given power to distribute assets to other trusts or create sub-trusts, or to make outright gifts to beneficiaries. High net worth individuals who create trusts in their lifetime may avoid the need for a public grant of probate on their death in respect of trust assets, and may ensure that their wealth does not pass directly to their children to be dissipated. Indeed, an older generation of beneficiaries with the assistance of the trustee may keep a younger generation ignorant of their status as discretionary beneficiaries of a very valuable trust fund, so that they study and work hard for qualifications that help in the success of companies held within the trust fund. If a high net worth individual's patrimony on death would be subject to forced heirship rights, these rights may be avoided if assets are held in a trust in a common law jurisdiction with protection provided by legislation like the Bahamian Trusts (Choice of Governing Law) Act 1989 as amended in 2016.

A company carrying on trust business needs to be licensed under the Banks and Trust Companies Regulation Act 2020, unless it is a “Private Trust Company” acting as trustee of a private family trust, when family members may be directors of such trust company. Trustees hold a ring-fenced fund protecting the fund from the trustees’ creditors, except for debts incurred by the trustee acting as such. Usually, the settlor and the other beneficiaries will only be the objects of a discretionary power to distribute to them (or to trustees for them) income or capital, so that all they have is the hope of receiving a distribution of income or capital from the trustee or another person named in the trust instrument as having power to make such a distribution. Such a hope is not the property of a discretionary beneficiary against which their judgment creditor can levy execution to obtain payment of the beneficiary’s debt.

The exercise of a power to benefit a discretionary beneficiary can also require the written consent of a designated person. Such consent may be withheld at a personal whim without giving reasons or may only be withheld if the consent giver considers that the exerciser of the power has not made a fully informed decision, taking account of relevant factors and ignoring irrelevant factors.

To keep up with high global regulatory standards to prevent fraud, tax evasion and money laundering, The Bahamas has enacted much legislation over the last four years so as not to be on the EU List of Non-cooperative jurisdictions for tax purposes. It is participating in the OECD Pillar 2 Tax Framework that includes the Base Erosion and Profit Shifting Inclusive Framework, having enacted the Commercial Entities (Substance Requirements) Act 2023 supported by Regulations and Guidance Notes. Moreover, in the fiscal year 2024-2025 The Bahamas will introduce the Qualified Domestic Minimum Top-Up Tax, a corporate income tax of 15% in respect of multinational enterprises earning more than EUR750 million annually. It is estimated that this will produce USD140 million annually and will help the government with its plans to improve the airports on outlying islands, facilitating greater access.

A Securities Industry Bill 2024 is currently before Parliament, and is a holistic overhaul of the Securities Industry Act 2011, replacing it with an updated and modernised securities industry framework to ensure that the relevant laws are current and competitive, and reflect international best practice.

A Digital Assets and Registered Exchanges Bill is also before Parliament, to replace the 2020 Act of that name. It takes a proactive approach to improving the current regime by introducing a robust framework with greater focus on the protection of consumers and investors, as well as market development and innovation.

The FTX cryptocurrency insolvency in November 2022 attracted unwanted attention for The Bahamas, but it needs to be noted that the statutory framework led to a sufficiently early intervention in The Bahamas and then the USA, which resulted in there being more than enough to satisfy creditors. The above 2024 Bills, however, when duly enacted, will provide a stronger statutory framework for the protection of investors.

The Bahamas provides a safe nourishing environment for growing wealth, while being a very pleasant place to live, work or holiday, with very good international communications and skilled experienced bodies of lawyers, trustees, bankers, accountants and investment managers keen to have their experience utilised.