New Private Trust Company Legislation for Bahamas

Background

In order to accommodate a wider market and improve efficiency in the local wealth management industry, in the final legislative session of 2006 the Bahamian Parliament approved comprehensive new private trust company (PTC) legislation.

The PTC legislation is the product of collaboration between a multi-disciplinary working group established in 2005, the Central Bank and the government. The working group comprised representatives of:

the Bahamas Financial Services Board;

the Association of International Trust Companies in The Bahamas; and

the Society of Trust and Estate Practitioners.

Aims and Objectives

The board sees the target market for PTCs as charitable foundations, wealthy families which already have a family office and wealthy individuals from civil law countries.

Andrew Law, former chairman of the Association of International Trust Companies in The Bahamas and president and chief executive officer of International Protector Group Ltd, explained that the decision was taken early on not to permit PTCs to be used in commercial applications:

"From the very beginning we were mindful of the abuse of PTCs in other jurisdictions, particularly in commercial applications, such as acting as trustee for unit trusts or mutual funds, pension funds, employee benefit plans, insurance trusts, insolvency/escrow arrangements, financing for special purpose vehicles, but Bahamian foundations, purpose trusts, international business companies or a combination of these structures may be more appropriately used to achieve the same commercial purpose with comparable cost and benefits. And there is always the restricted trust licence, which may be ideal where a greater degree of scrutiny and regulation is required. In any case, the Central Bank and The Bahamas government would not have agreed to the introduction of PTCs without the restrictions preventing their use in commercial applications.

We expect those jurisdictions that currently permit PTCs to be used in commercial applications to eventually limit their use to families in response to pressure from regulators and other special interest groups."

Jan Mezulanik, chairman of the Association of International Trust Companies in The Bahamas, is confident that the new legislation will spur growth in the local trust and wealth management business. Commenting on the reasons behind the introduction of the new legislation at this time, he observed that:

"Private trust companies have become a preferred tool in the structuring of the estate and inheritance planning needs of the very-high and ultra high-net worth families and can provide the families with a greater level of involvement over the investment of trust assets. The legislation enables service providers in The Bahamas to offer this estate planning option to clients."

Justifying the multi-disciplinary collaboration and the substantial amount of resources that went into the development of the legislation, Wendy Warren, chief executive officer and executive director of the board, explained that:

"As much as possible we wanted to establish PTC legislation that could stand the test of time and provide [a] stable platform for decision making. In other words, we did not take any shortcuts.

We carefully considered a number of factors, such as what the PTC legislation intends to accomplish, our clients' needs and the regulatory themes that may emerge in the future. In summary, the legislation provides clarity for clients and their advisers and a light regulatory touch."

It is widely hoped by the government and industry stakeholders that the introduction of PTCs will lead to the establishment of family offices in The Bahamas. A family office can help to develop a family culture and serve as a forum for the education of beneficiaries on financial matters and the management of the family's businesses and holdings. Further, control and influence can be gradually transferred to the next generation through a properly functioning family office. However, PTCs do not have to establish a physical presence in the jurisdiction.

Ownership and Control

Under the new legislation, the settlor may own the PTC directly or through another member of his or her family. A preferable alternative is to have the trustee of a Bahamian purpose trust own the shares of the PTC. The purpose trust would be established solely to own the shares of the PTC for the benefit of the settlor and his or her family members. The PTC has no value beyond its sole purpose, which is to act as trustee of the family trust. Its value will not often exceed its paid-up share capital, which must be at least B$5,000 under the new legislation.

PTCs will enable the settlor, other family members and trusted professional advisers to exercise significant control through the board of directors of the trust company. Some settlors who might otherwise have difficulty understanding the trust concept and the handing over of their assets to a third-party trustee or bank will, in many cases, find comfort in being a shareholder or director of the PTC with the power to elect other directors.

Therefore, it is unnecessary for the settlor to provide the PTC with a letter of wishes, since he or she may actively participate on the board of directors (either in person or through an agent or other representative) to ensure that his or her wishes and objectives are being met.

Costs and Efficiency

The operating costs of a PTC will often be less than those paid to institutional professional trustees. Unlike PTCs, professional trustees usually incorporate fiduciary risk-related charges into their fees.

The flexibility and responsiveness of institutional professional trustees is often limited, whereas PTCs will be able to make decisions more quickly and less expensively. For example, changing a professional institutional trustee can often be slow and expensive as it involves:

the settlement of numerous deeds;

the closure of old trust accounts and opening of new ones;

the transfer of assets; and

the settlement of protective mechanisms to safeguard the predecessor trustee from future liability.

On the other hand, changing the directors in a PTC can be done simply, by resignation and resolution. Directors of a PTC are not principals, they are merely agents. Any liability incurred by the PTC falls on the PTC, rather than the board members themselves.

However, there are circumstances in which the directors of a PTC will incur personal liability. Professional directors of a PTC should always obtain professional legal advice on their liability before accepting a PTC board position in order to ascertain the need for directors' and officers' liability insurance.

The speed with which a PTC can make decisions offers numerous benefits. In cases where the trust's assets consist of equities, the PTC will be able to react much more promptly to a request for trustee approval for a major transaction than an institutional professional trustee which, for fiduciary and liability reasons, may wish to examine the transaction in greater detail or take legal advice before giving its approval. Although well intentioned, this may result in considerable delay and cause the transaction to be less profitable.

Regulation and Approval

PTCs do not require regulatory approval; the only requirement is that they have a licensed registered representative in The Bahamas at all times. Only officers of a bank, trust company or corporate service provider approved by the governor of the Central Bank under the Financial and Corporate Service Providers Act may act as registered representatives.

The approach of the new legislation is based on minimal intervention, distinguishing Bahamian PTCs from those in other jurisdictions. Client information remains exclusively with the registered representative.

A registered representative must maintain in The Bahamas copies of the constitutive documents of each PTC for which it provides private trust services.

Designated Instruments and Persons

Under the new legislation, PTCs may not solicit trust business from any party except the designated person on whose behalf the PTC was established. However, there may be more than one designated person, provided that the designated persons are related by consanguinity or other family relationship.

The designated person must be named and established in a document known as the 'designating instrument'. A copy of the designating instrument must be kept in The Bahamas at the office of the registered representative.

Another distinguishing feature is that the legislation permits PTCs to be established during and after the life of the designated person or persons.

Trusteeship

Under the new legislation, a PTC may be appointed as trustee to new or existing trusts established by persons related by consanguinity or other family relationship to the designated person or persons.

The beneficiaries of the trusts held by PTCs need not be family members of the designated person or persons.

Directors and Special Directors

The registered representative may serve as director, secretary or Bahamian agent to the PTC.

In addition, PTCs must have at least one special director at all times, unless the registered representative of the PTC is an officer of a bank or trust company. A 'special director' is defined in the new legislation as a person (not necessarily a resident of The Bahamas) of good reputation who possesses at least five years' experience in a discipline relevant to the administration of trusts. The special director may be drawn from the fields of law, finance, commerce, investment management or accountancy.

Comment

PTCs are a welcome wealth management tool. They offer numerous advantages in the management of assets held on trust in regard to costs, efficiency, ownership and control.

Key features of the new PTC legislation are the minimalist regulatory requirements and the legion of available service providers drawn from a range of disciplines.

Another welcome feature is that there may be more than one designated person, provided that the designated persons are related by consanguinity or other family relationship. In addition, the provisions permitting the PTC to act as trustee of new and existing trusts and enabling trusts to be established during or after the life of the designated person are positive developments. The fact that the beneficiaries of trusts administered by a PTC do not have to be family members of the designated person adds another dimension of flexibility.

International Law Office