Bahamas Trusts and Foundations

By Frances Emery By Frances Emery

It’s a little-known fact that the world’s first Common Law country to pass legislation for private foundations was the Bahamas. It was 2004, and the Caribbean island nation had already established a reputation for creating innovative financial structuring solutions, and it was decided that the private foundation would be introduced as an additional tool for wealth planning and protection. Soon enough, it was being utilized by investors from all over the world. It was one component in a broader legislative agenda that was designed to strengthen the country’s regulatory environment, while helping to create a climate in which international business would truly thrive. 

Foundations have not traditionally been seen as a structure that the average person considers when managing his or her finances. But, frankly, there is nothing ordinary or predictable about the state of the global economy today, and circumstances such as these call for extenuating actions. In the global context of increasing concern about both asset protection and market stability, informing oneself about the multitude of financial structures available for protecting one’s wealth is not only becoming common practice, but essential, too. In China specifically, where the last few decades of growth and development have given rise to both the creation of an economic powerhouse, along with a more recent and looming sense that something – which no one dares call a bubble – may just burst, looking in different directions or further afield for financial planning solutions is simply prudent and pragmatic.

Nothing has driven this fact home more than the recent market dive in Shanghai. Add to this the rapid growth of high net worth individuals and rising levels of both personal wealth and expendable income, and you have another reason that research into offshore structures and asset management strategies – along with the seeking of expert advice on their often opaque-seeming intricacies – is being done by any sensible Chinese citizen. From the so-called “second generation of the rich” (or fuerdai) to the self-made business person whose parents identified themselves as laobaixing,  – metaphorically, the People – the populous is eager to ensure that both their assets and legacy are protected. Add to these factors the rising divorce rates in China, and the role that offshore financial structures such as foundations and trusts play in asset-protection and risk mitigation can no longer be ignored.

Whether an offshore foundation or an offshore trust is the most suitable structure for helping to manage an individual’s personal  finances depends, of course, on their objectives and, as CEO and Executive Director of the Bahamas Financial Services Board, Aliya Allen, puts it, “their level of comfort with the structure.” One of the key differences between a foundation and a trust is that, in the case of a foundation, it would be a legal entity that holds a person’s assets. Therefore, “for those more familiar or comfortable with the concept of a legal entity (within which some control can be maintained) as the holder of their assets,” she explains, “the foundation might be a better fit.”

There are plenty of other differences between these two structures that are worth noting, of course. Foundations were originally a civil law concept, whereas trusts are a legal concept, and were first developed under English Common Law. Private foundations require that a foundation charter is registered at a Public Registry, which is not the case with trusts. Although this process may effectively make some limited information regarding a foundation public, a private foundation can grant the status “independent legal person”, which is a factor that swings in its favor. The power of control and administration of a private foundation rests with a foundation board, which is much like a company’s board of directors. Another welcome (yet unexpected) point of consideration is the fact that Chinese law is, in fact, based on 19th Century German civil law codes, which included concepts of structures like foundations. This, in itself, often means that Chinese clients are more at ease with private foundations, compared to other solutions like private trusts.

The Bahamas, specifically, offers a robust environment for tailored structures, including foundations, which were initially established in the country to meet the requirements of a progressively more sophisticated financial services marketplace. Once a foundation is established under the Bahamas’ Foundations Act, it is regarded as domiciled within the jurisdiction. Foundations can, however, be re-domiciled in other jurisdictions, just as foundations from foreign jurisdictions can be re-domiciled in the Bahamas (subject to the laws of that jurisdiction.) Contrary to popular belief, a foundation’s purposes can and do go beyond charitable endeavors, and under Bahamian law, the establishment of foundations can be for private, commercial or charitable purposes. This is provided that the purpose stipulated is ancillary to its primary purpose, which is (necessarily) managing its assets.

Private foundations domiciled in the Bahamas have their own unique features, as compared to private trusts, but these two structures have several things in common, too. Indeed, the Bahamas Foundation has, in fact, been called the “hybrid vehicle” of the offshore finance world because of its likeness to both a trust and a company, and the combination of their shared features. Foundations have people or entities that are nominated as beneficiaries, just as trusts do, and both structures are predominantly used to avoid enforced heirship in other jurisdictions – typically, those in which citizenship is held. Foundations, like companies, are distinct legal entities with limited liability and must be registered, along with an office. Foundations also have several key positions that need to be filled, including a Founder and a Secretary, as is the case with both trusts and companies. One key difference is that even though foundations are registered entities in the Bahamas, confidentiality is still maintained because of the fact that the Founder’s name remains private. It is these “trust-like” aspects of the Bahamas foundation that serve the needs of high net worth individuals and wealthy families who are utilizing the structure as part of their estate planning.

The Founder of a private foundation is very often the patriarch within a family unit, and more and more Chinese families are fitting into this category as offshore finance’s doors are increasingly wide open to them. Although a Founder grants a foundation the right to manage assets on behalf of its beneficiaries (much like a trust) they may choose to stay closely involved with the investment and distribution of the assets, which tends to provide added peace of mind. It is also worth noting that the number of powers that can be reserved by a Bahamas foundation’s Founder is greater than when setting up a trust. This, in itself, is a feature which is highly valued by Chinese whose primary motivation for distributing assets offshore is to safeguard their wealth for future generations. And, with inheritance taxes under serious consideration in China for the last decade – and a law currently in the drafting stages – concerns about losing control of one’s assets are only growing in the world’s largest economy.

Certainly, there is a plethora of jurisdictions to choose from before the process of setting up a foundation or a trust begins. The Bahamas shares several of its Caribbean neighbors’ attributes as an offshore financial center, but there are a few distinct characteristics that, in certain people’s view, set it apart. Known today as the “Switzerland of the Western Hemisphere”, the Bahamas was, in fact,

the world’s first offshore financial center, by virtue of the fact that the Royal Bank of Canada established a branch in Nassau in 1908. Since that day, years of continuous adaptation, cooperation and sheer effort have given rise to one of the most reliable and mature international financial centers on the globe. Those who entrust the jurisdiction with their hard-earned wealth don’t hesitate to call it the regional leader, both in terms of its reliability and its competitive offering of comprehensive financial services and products for high net worth individuals’ needs.

The jurisdiction’s expertise and advancements in terms of regulation and legislation also contribute to the reputation it has earned. As a matter of fact, legislation – and the country’s legal standing in general – has been pivotal in allowing the jurisdiction to act in the best interests of the members of the financial services industry, and the Bahamas’ sovereignty is central to this. The country achieved independence from Britain (while remaining part of the Commonwealth) in 1973, and has since remained a responsible member of the international community while exercising its power to make personal privacy a sanctified right, and to create a tax neutral environment that serves both its citizens and foreign investors.

The country also owes its success in the financial arena to several other elements, foremost among them, its location. Considered both geographically and politically strategic because of its position midway between North and South America, the Bahamas’ location has historically always been on its side. In terms of the location’s physical attributes, it is often argued that the Bahamas’ archipelago of 700 islands is unrivalled as a luxury lifestyle destination, and in this way it has attracted a range of exclusive clientele.Although financial citizenship and permanent residency in the Caribbean island nation are both viable options, the offshore financial structure that attracts, perhaps, the most significant proportion of the country’s investors is the private trust – a structure which does not require that a Trustor is based within the jurisdiction. The benefits of this particular structure for Chinese families can be grouped into three key areas: tax planning, asset protection and inheritance planning.

As a device for tax planning, trusts may lead to considerable savings in income tax, capital gains tax, gift tax, as well as stamp duty. When it comes to asset protection, the jurisdiction’s legal provisions are largely considered unparalleled. This is rooted in the fact that there is a two year time limit within which a trust structure can be challenged for having been set up in order to evade creditors. Beyond that point in time, challenges are no longer permitted. Neither can structures be challenged at any time by referring to a law that exists outside the jurisdiction, thanks to the Bahamas’ rigorous legal system. A well-structured trust can serve to protect against creditor’s claims (including, but not limited to bankruptcy and professional liability), claims involving a will and – of increasing importance in today’s China – protection against divorce, particularly in cases where matrimonial property is involved.

According to one of Allbright Law Offices’ lawyers, Wang Fan, whose expertise includes advising Chinese clients on offshore wealth management, “What high net worth individuals are concerned with is the safety of protecting such assets, namely arranging for their assets to be separated and protected, whether for divorce or other purposes.” Although all manner of offshore financial products aim to protect assets to some extent, when a wealthy Chinese spouse specifically seeks to protect their assets against divorce, offshore trusts are considered most conducive. By their nature, trusts legally belong to neither of the spouses in question, so there is absolutely no risk of them being surrendered during a divorce settlement. In one particular case that Ms. Wang handled, a female client owned assets worth approximately RMB 100 million when she initiated a divorce lawsuit against her husband a year after getting married. She had fallen pregnant before the wedding, and had established an offshore trust in New Zealand prior to marrying him. Once the divorce procedures were over, her assets were safely in the metaphorical hands of a trust beneficiary: her child.

But, whether an offshore trust is being considered as a way of safeguarding against losing one’s assets in a divorce, or as a precaution of another kind, Chinese citizens often find themselves wondering whether a domestic trust structure (for which China has legal provisions) wouldn’t be a better – or a safer – avenue. The sentiment is easy to understand, but when it comes to ensuring the security of all your worldly possessions, it is far wiser to look to one of the leaders in offshore finance: The Cayman  Islands, The British Virgin Islands or, increasingly, the Bahamas. Chinese citizens have the legal right to establish offshore trusts, and China’s environment for trust laws is, quite simply, imperfect. Although Beijing introduced a trust law over a decade ago, in 2001, it is considered more of a commercial product or form of “investment fund”, rather than a viable structure for private wealth planning.

This brings us to the third – and currently very topical – benefit of a private trust: inheritance planning. If China does, in fact, join the 100 or so countries in the world that currently impose inheritance taxes on their citizens, this could have unexpectedly devastating effects on personal wealth. In Japan, for example, estate tax is applied on a sliding scale of as much as 55%. Chinese inheritors or offspring would also stand to pay millions of renminbi before being granted the inheritance funds to which they are entitled. A properly structured trust – domiciled  outside of China – would mean avoiding such a fate.

The choice of jurisdiction in which a foundation or a trust – or any number of other wealth management structures – is domiciled should be based on several factors. The client seeking legal advice from Ms. Wang was presumably considering emigration to New Zealand at some point in the future, just as other clients choose European jurisdictions because of a desire or a need to be close to Europe or the UK. The Bahamas suits plenty of high net worth individuals (Chinese or otherwise) whose requirements include relatively close proximity – or, indeed, equidistance – to North and South America. But there are countless other circumstances that could influence a family’s choice.

One example is the increasingly common case of (non-US citizen)Chinese parents setting up a trust for children who hold US citizenship – or, indeed, may potentially hold it in future, after graduating from a US university, for instance. In this case, foreign trusts are usually best suited to non-US citizens, and will mean avoiding potential issues with US tax filings. But circumstances change, and in the event that Chinese parents’ offspring intend on adopting US citizenship for life, the US-based offshore jurisdiction of Delaware has certain provisions for avoiding such unwanted penalties as phantom income tax and interest charges in the case that a  trust remains offshore after a Trustor’s death.

Arming oneself with information about which jurisdiction is most qualified and experienced to meet one’s particular financial requirements before making a decision is, of course, key. Where experience is concerned, the Bahamas stands out easily. Indeed, in August 2015, the country’s Securities Commission celebrated twenty years of service in Nassau, the capital. There was cause for celebration, saidMr. Rolle, Financial Secretary in the Ministry of Finance. “It’s not just the Securities Commission we applaud, but the accomplishments in financial services as a whole and the way we’ve responded to the international challenges. Even though I note the importance of the international markets, I personally always take note of the amount of development over the years in our domestic sector, the establishment of the Bahamas International Securities Exchange (BISX) and the development of new and innovative products.”

The newest among these products is the Investment Condominium (ICON), an alternative to standard vehicles for the formation and licensing of investment funds.Passed into law less than a year ago, in October 2014, Ms. Rolle, the Commission’s Executive Director, announced that they are already “beginning to see the fruit of [this] innovation of the financial services industry.” Being one of the pioneers inan industry doesn’t happen without strong determination. And, historically, the Bahamas has demonstrated that determination such as this will bear fruit.


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