|The Bahamas Investor Magazine
January 1, 2006
January 1, 2006
Much of the history of transferring family wealth between generations is, unfortunately, littered with failure around the world. Such a too-common outcome is the inspiration for that old American proverb: “shirtsleeves to shirtsleeves in three generations.” It’s a scenario that typically runs over three stages: creating wealth, then holding on to it and, lastly, losing it or simply using it up.
There are many theories on how to extend the period of wealth creation through as many generations as possible to defer its decline. However, a common, and often integral, strategy among such theories is to effectively structure wealth for the long term. Bahamian trusts have long been applied towards this objective. They have also been used to obtain additional privacy, avoid probate at death, obtain tax benefits, consolidate assets and protect assets from future litigation and disputes. Others have used Bahamian trusts to provide shelter and protection from forced heirship provisions, domestic political strife and instability, and exchange controls in their home countries.
Structuring wealth through an established offshore jurisdiction such as The Bahamas, that has progressive laws, an educated workforce, and reputable financial institutions (many of which are household names in many parts of the world), can hold particular benefits for families based in, or with connections to, the United States, Canada, Latin America and Europe. We highlight some of the advantages that can be derived for people in each region, using financial services based in The Bahamas.
US: Serious about taxes
The US is arguably the world’s most influential economic and political power. It is also common for many wealthy families anywhere in the world to have some connection with the US, whether via their relatives or through business interests. Accordingly, when such factors are combined with The Bahamas’ close physical proximity to the US, it is appropriate to give this section additional emphasis (keep in mind that most Bahamian statutory references mentioned here will have equal application in other jurisdictions).
Taxation: US citizens are subject to US taxation on their worldwide income and gains, regardless of their residency status. In addition, non-US citizens resident in America are subject to similar worldwide US taxation. The fact that assets are located offshore, within a trust or otherwise, is irrelevant. Any suggestion to the contrary is simply a myth–one unfortunately perpetrated by unscrupulous promoters highlighted in US media in recent years.
For people from the US (whether citizens or residents), there are limited tax-related planning opportunities offshore. In very general terms, the most common opportunity in this regard is to use Bahamian-based (and US-tax compliant) insurance policies and/or private annuities (normally in conjunction with a trust) in The Bahamas. Over the past several years, The Bahamas has emerged as a leader in providing such insurance and annuity products.
This said, there are certain US tax-related planning strategies that exist in cases where there are non-US elements to a family’s set of circumstances. Relatively common trust structures can provide for, in some cases, substantial US tax savings. Scenarios can include the move of a wealthy individual to the US, people abroad who have US situs assets (such as real estate and securities located in the US), or those who have children or other potential heirs residing in the US.
In 2002, The Bahamas signed a Tax Information Exchange Agreement (TIEA) with the US, as have most countries around the world (The Bahamas has no other such agreements). This comes into full force in 2006. This agreement provides even further need for professional offshore US tax-compliant trust administration services for US citizens, US residents and non-US residents who have US connections, as is the case in The Bahamas.
Asset Protection: While tax savings offshore may not be a primary motive for most Americans, prudent, tax-neutral, timely and lawful preservation and protection of assets most definitely is. To reiterate the obvious, the US is the most litigious environment in the world, with frivolous lawsuits commonplace, adding another motivator to guard wealth against future claims, including any that may be opportunistic.
Strategies of varying degrees exist to help protect assets from future potential litigation from creditors and/or disgruntled family members or heirs. One of the most common methods of asset protection is the use of trusts. In one sense, most Bahamian trusts established by Americans, although transparent from a tax perspective, are “asset protection trusts.” If it is properly established, the trust’s assets no longer form part of one’s estate and are not subject to the claims of future creditors or heirs and/or their spouses–either before or after the individual’s death. Bahamian trust statutes strengthen such protection.
Unlike most US states, The Bahamas recognizes what is commonly referred to in America as “self-settled spendthrift” trusts. These are trusts in which the settlor retains an interest as a beneficiary, even if it is only a potential to receive distributions from the trust within the discretion of an independent, third-party trustee.
The Statute of Elizabeth, enacted in England in 1571, voids any transfer made with the intent to defeat, delay or hinder any creditor. Such rule, in the view of many lawyers, sets a very low threshold relating to the imputation of fraudulent intent. As a result, most would suggest that there is limited asset protection in jurisdictions in which the Statute of Elizabeth is in force. In 1991, The Bahamas repealed the Statute of Elizabeth and enacted its own Fraudulent Dispositions Act. In essence, this provides that a claim must be made in The Bahamas, and the creditor must establish that the transferor had fraudulent intent to willfully defeat the obligation owed to a creditor at the time of transferring assets to a trust. Any claim must be made within two years of the date of transfer. The key, of course, is to establish trusts well before such litigious events take place.
It is also important to note that The Bahamas also denies “judicial comity” to most foreign judgements, meaning a lack of ability of a US judgement to be filed and enforced in The Bahamas.
Canada: Transitions for global citizens
While the atmosphere in Canada is somewhat less litigious than in the US, many wealthy Canadians have also established tax-neutral or transparent trusts in The Bahamas simply as a form of insurance or protection against future, currently unforeseen, litigation.
Canadian residents (citizenship is not generally relevant) are taxable in Canada on their worldwide income, including passive investment income earned abroad and not remitted to Canada. While the tax regime in Canada vis-à-vis foreign trusts has changed significantly over the past several years, there are two relatively common structures that may provide for Canadian tax savings, both involving a foreign component.
First, new immigrants to Canada may benefit from a tax holiday of up to five years’ duration through a properly structured Bahamian trust (commonly referred to as an “immigrant trust”).
Second, “inbound trusts” are Bahamian trusts established by people who don’t reside in Canada for the benefit, in whole or in part, of Canadian residents. All income and gains earned in such trusts (provided they are properly structured) should not be subject to Canadian taxation, so long as the non-resident settlor has not been a resident of Canada for a specified period.
Europe and Latin America: Civil law
The concept of duality of ownership in common law and in equity, the basis for the common law trust, is in total opposition to the concept of unitary and absolute type of ownership found in most civil law countries.
This has been the basis for much debate over many years, to determine the proper view of trusts from a civil law perspective. Interestingly, trusts have been effectively recognized in some court cases in certain civil law countries (including France). These cases arguably illustrate an emerging global trend of civil law countries gradually moving towards acceptance, and therefore eventual formal recognition of, trusts, including those domiciled in The Bahamas.
Foundations: In cases where someone in a civil law jurisdiction feels discomfort or uncertainty in using trusts as an estate-planning vehicle, the new Bahamian Foundations Act, 2004 may provide an appropriate alternative. The enactment of this law (traditionally a civil law entity) in The Bahamas illustrates another global trend: this one, of common law countries slowly moving towards acceptance and, therefore recognition of, foundations–and The Bahamas has been a pioneer in this regard.
Avoiding forced heirship: In the United Kingdom and other common law jurisdictions, one can generally leave one’s assets to whomever one chooses (subject in many cases to claims from heirs deemed financially dependent). However, in France and other civil law jurisdictions, things are very different. For example, in France, whatever your will says can be overturned by your héritiers réservataires (protected heirs). Such inheritance or succession law is commonly referred to as forced heirship. However, The Trusts (Choice of Governing Law) Act, 1989 in The Bahamas makes specific provision for the protection of trust property from forced heirship or similar foreign claims. An amendment to this Act in 1996 made it clear that heirship rights include existing or anticipatory rights and that foreign judgements relating to such claims are not enforceable by a Bahamian court.
Keeping tighter control: While perhaps accepting the overall estate planning benefits of trusts, many people from civil law countries are fundamentally opposed to relinquishing complete control over their assets to a trustee. Bahamian trust and foundation laws offer a potential solution for such concerns–Bahamian law provides that the settlor of a trust (or founder of a foundation) may retain certain powers (including the power over investments) over the trust or foundation, without compromising the integrity of the trust or foundation under Bahamian law. The Bahamian trust and foundation statutes also recognize the role of the “protector,” which may provide for some additional peace of mind in this regard.
Asset planning with a global scope
This article is not intended to be an exhaustive review of Bahamian-based fiduciary structures: In fact, there are many other vehicles here in The Bahamas which can be used to facilitate international estate planning and structuring, such as purpose trusts, funds, companies and partnerships. Further, one must always keep in mind that taxation can be a very complicated discipline within the realm of estate planning. For this reason, this article is not intended to infer or provide any form of tax advice: Obtaining personalized advice from competent professional counsel is strongly encouraged and, in many cases, required.
What we do illustrate is the high standard and progressive nature of fiduciary capabilities in The Bahamas, along with its innovative statutory regime. When combined with competent external professional tax, legal and estate-planning advice and an established and reputable trustee/fiduciary, The Bahamas is arguably among the top jurisdictions in the offshore world in which to build and maintain a long-term structure to hold and preserve wealth.
Such factors have also led to a number of global financial institutions establishing significant presence over the last century, thus further illustrating confidence in the Bahamian financial services sector. All of these factors lead to accomplishing a relatively simple, yet vital goal: peace of mind. Hopefully, at the same time, one can push back and defer the latter stages of that old American proverb cited earlier, of getting back to shirtsleeves.
Steve J Sokic
Steve J Sokic BA, CMA, CFP, TEP is a senior manager with Royal Bank of Canada Trust Company (Bahamas) Ltd, Royal Bank of Canada’s Global Private Banking trust subsidiary in Nassau. He also co-leads RBC’s US Private Wealth Group in the Caribbean region which establishes and administers tax-compliant fiduciary structures for Americans and people around the world who have US connections. Prior to joining RBC, Sokic was a senior tax manager with Deloitte & Touche in Toronto, Canada, practising primarily in international trust and estate planning.