Bahamas: Law of Offshore
Bahamian trust law is based on English common law, and the Bahamian Trustee Act 1893. Later legislation includes The Trust (Choice of Governing Law) Act 1989, the Fraudulent Dispositions Act 1991 and the Trustee Act 1998, which repeals the Trustee Act 1983 and the Variation of Trusts Act 1983. The Purpose Trust Act of 2004 introduced purpose trusts.
The Trust (Choice of Governing Law) Act 1989 gives protection to Bahamian trusts and their settlors in civil law countries against forced inheritance claims. The Act makes Bahamian law the proper law of a trust if the deed so declares, and makes the trust immune to foreign judgements.
The Fraudulent Dispositions Act 1991 establishes a 2-year limitation period for creditors' attacks on asset protection trusts; the attacker has to prove fraud against the settlor.
The Trustee Act 1998 is an important piece of legislation which updates Bahamian trust law on many fronts. Some of the more important provisions are as follows:
- A settlor can retain a wide range of powers without falling foul of 'sham' trust legislation;
- Trustees are given wide statutory investment and management powers unless the trust deed negates them;
- Trustees' indemnities are recited in the statute;
- A wide range of trust purposes are encompassed, including accumulation trusts;
- The role of Protector is recognised;
- There are extensive disclosure provisions;
- Exemption from all taxes and from stamp duty (an initial $50 stamp is required on all trust deeds);
- Exemption from registration except where an interest in Bahamian property is to be protected;
- Exemption from exchange control regulations for non-resident beneficiaries.
The Act was to have included legislation covering purpose trusts; in fact a separate bill for purpose trusts was passed later in 2004.
The Purpose Trust Bill, 2004, added another dimension to the jurisdiction’s trust business. Trust benefits are for a purpose rather than persons or entities, and there is no one to whom beneficial entitlement in the trust property is vested.
"There are many estate planning exercises and other commercial transactions that can legitimately and properly take advantage of this kind of structure," said Alfred Sears, Attorney General.
These uses include:
- The holding of shares of a private company, which is expressly authorised by the Act. 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 or to keep the asset and corresponding liability from appearing on the purchaser’s balance sheet.
- Separating voting from economic control.
- Temporary avoidance of controlled foreign corporation rules.
- Debt Subordination to provide ranking of priority among creditors.
- Discretionary trusts to perpetuate a particular corporate governance philiosphy.
Much trust work in the Bahamas is handled by Public or Restricted Trust Administration companies, which are often affiliated to or owned by banks. Trust Administrators are licensed by the Central Bank under the Banks and Trust Companies Regulation Act 1965. The application process is lengthy and thorough, particularly for Public Trust Administrators. A foreign company can apply for a license as a branch, or with a subsidiary, which is necessarily a Bahamian-incorporated company (not an International Business Company). The license when issued specifies that a Trust Administrator is either resident (subject to exchange controls) or non-resident (exempt from exchange controls).
The minimum capital requirement for Trust Administrators is USD1m for Public and USD100,000 for Restricted Administrators (the clients of a Restricted Administrator are specified in the license and cannot be changed without approval). Capital is then expected to keep pace with the growth of the business, not falling below 5% of total assets. Public Trust Administrators must also post a fidelity bond of $1m.
The Perpetuities (Amendment) Act 2004 increased the period of a perpetuity from 80 to 150 years.
In September, 2004, a Dallas, Texas court ordered that the settlor of a Bahamas trust, John Eulich, should pay a fine of USD5,000 a day until he complied with a court order to supply trust documents to the Internal Revenue Service. After 30 days, the daily fine would increase to USD10,000.
When the IRS served a formal request for documents from the trust, Mr Eulich refused to provide the documents and claimed that he had no control over the trust and had exhausted his powers to try to get the documents. Judge Sam A Lindsay of the District Court disagreed, holding that the Settlor could still attempt to get the documents from the trust by appointing new administrators and by filing a lawsuit in the Bahamas. At any rate, the Court stated, it was not going to recognize the Settlor's "impossibility defense" because the impossibility was self-created, i.e., the Settlor's own drafting caused the impossibility.
The IRS investigated Eulich and his wife, Virginia, for the tax years of 1995, 1996 and 1997, and as part of its investigation, sought documents relating to the Bahamian trust, the Mona Elizabeth Mallion Settlement Trust No. 16 and to various corporations controlled by the Trust. To that end, the IRS issued formal document requests and summonses seeking the information.
The Eulichs gave their 'impossibility' defence in 1999, filing an action to quash the document requests relating to the Trust, and the Government subsequently filed counterclaims seeking to enforce the summonses. In 2002 a Magistrate Judge recommended enforcement of the IRS's requests, but both the Eulichs and the government objected to various terms of the Judge's ruling. In a Court of Appeal hearing in 2003, the judge excluded Virginia Eulich from the action, but affirmed the enforcement order against John Eulich.
On June 27, 2003, the Government filed a Motion to Hold Petitioner in Contempt of the Court's 2002 Order of Enforcement, and after a hearing on March 12, 2004, the Magistrate Judge recommended that the court hold Eulich in civil contempt of court, imposing a fine of USD1,500 a day pending production of the documents. Once again, both parties objected to the findings.
The judge at the later hearing (18th August) imposed the larger fine in response to the government's objection on the grounds that the trust's assets of between USD70m and USD100m were or could be generating up to USD14,000 in interest a day. The judgement contains a detailed and highly interesting discussion of various aspects of Eulich's efforts - or otherwise - to comply with the terms of the IRS's requests, by no means entirely in the government's favour.