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Making your plans for charitable giving

Making your plans for charitable giving

Philanthropic vehicles will benefit clients

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The Bahamas Investor Magazine
January 4, 2008
January 4, 2008
Christian Coquoz

Philanthropy can be defined as the act of donating money, goods, time or effort to support a charitable cause, usually over an extended period of time and in regard to a defined objective. Philanthropy can therefore be seen as a vehicle for improving the quality of life for a specified group of people who may not have been in a position to help themselves. The advantages of philanthropic efforts are numerous and effectively managing philanthropic and charitable efforts has its share of challenges. Nevertheless, philanthropy is viewed by many as a positive act or gesture and the financial services industry has been a major facilitator of efforts in this regard. The strategic geographical location of The Bahamas and its status as a common-law jurisdiction makes it a desirable financial centre for individuals and organizations in the promotion of their philanthropic and charitable causes. These causes are often promoted through the establishment and use of charitable trusts.

Charitable trusts defined
Charitable trusts, by legal definition, are established solely for charitable purposes. These purposes include the relief of poverty, the advancement of education, the advancement of religion, and any other purposes beneficial to the community. In The Bahamas, charitable trusts are governed by the Purpose Trust Act (PTA) 2004. One of the primary reasons for the enactment of the PTA was to provide legislation separate from the Trustees Act (TA) 1998, that would make provisions for prospective settlors who desired trusts solely for charitable purposes. When establishing a charitable trust, the general rules of law regarding ordinary trusts apply. It is imperative when establishing a charitable trust within the framework of the PTA that: the purpose be possible and sufficiently certain to allow the trust to be carried out; the purpose is not contrary to public policy or unlawful; and the trust instrument specify the event upon which the trust terminates and provide for the disposition of surplus assets of the trust upon its termination. One of the privileges enjoyed by a trust that is established pursuant to the PTA, and more specifically, with a charitable trust in comparison to an ordinary trust, is that there is no rule against perpetuity. Therefore, a charitable trust may choose to continue indefinitely.

The majority of the trusts established in The Bahamas are set up predominantly for the preservation of family wealth and estate-planning purposes. Trusts are often created to enable the settlor to make provisions for his or her spouse and descendants during and after the settlor’s lifetime. In certain instances, the settlor may, by choice, also make provisions that a certain amount, or in some instances all, of his or her wealth be donated to a charity of his or her choice. Current trends in the financial services industry have shown that trust companies are being approached by both existing and prospective clients whose intentions are to establish a trust solely for charitable purposes.

Unlike ordinary trusts, charitable trusts are not required to benefit named beneficiaries or classes of beneficiaries. Hence, once the purpose of the trust has been ascertained within the framework of the trust instrument, and provided there is a charity or organization that fits within the specified purpose, the named charity or organization may qualify as a prospective beneficiary of a charitable trust. For this reason, the charitable trustee acting in a fiduciary capacity must be certain that prospective beneficiaries of the charitable trust are qualified and legitimate beneficiaries.

Role of the trustee
For trustees managing charitable trusts, there are several issues that may arise regarding the distribution of assets from within the trust. One of the major concerns for the trustee is the ability to ascertain whether the recipient charity or organization is a valid and existing one, and falls within the ambit of the purpose set for the charitable trust. The difficulty is less likely where the charity is well known, such as in the case of the Red Cross; however, for charities unknown to the trustee, one would have to resort to searches on the Internet for information, or verification with the regulators and/or registrars in the country of domicile of the prospective beneficiary to validate its existence and purpose. It should be noted that the requirement for registration is not imposed by law in all jurisdictions.

In The Bahamas, guidance for verification of the legitimacy of charitable and non-profit organizations is provided by Article 90 of the Anti-Money Laundering (AML) Guidelines. The AML Guidelines state, inter alia, that licensees of The Central Bank of The Bahamas should “satisfy themselves as to the legitimacy of the organization by, for example, requesting sight of the constitution.” The AML Guidelines further provide a list of relevant websites in its Appendix B, which provide information on non-profit organizations and charities.

It is vital that the charitable trustee is sufficiently satisfied that any distributions made to the proposed charitable trusts will not be misused to commit offences. An example of this is a seemingly legitimate entity that may, in fact, be a conduit to fund such activities as terrorist financing or escaping asset-freezing measures.

At the present time, no regulatory body exists in The Bahamas that requires charities or non-profit organizations to be registered; however, other jurisdictions have specific bodies to govern the manner in which charitable institutions function. The United Kingdom is a prime example. The Charity Commission in the United Kingdom was originally established pursuant to the Charities Act 1993. The Commission was established in law as the regulator and registrar of charities in England and Wales. The objectives of the Commission include, inter alia: to increase the efficiency and effectiveness of charities to facilitate the creation and maintenance of public confidence and trust in established charities; to ensure that charities are not mismanaged; and to encourage charity trustees to comply with their legal obligations in exercising control and management of the administration of the charities.

The UK recently passed the Charities Act 2006, which came into force on February 27, 2007, and made several updates and changes to the former legislation. For instance, the role of the Commission is more defined in the current legislation. Other notable changes are that charities within the UK that earn a profit of more than £5,000 per annum are required by law to be registered with the Commission. Previously, charities that earned an income of more than £1,000 were required to be registered. Following comprehensive benchmarking with other countries such as Canada, Bermuda and the United States, The Bahamas may wish to consider adopting this approach by establishing a Charities Commission that will assume similar functions to that of its counterpart in the UK. This course of action should increase the efficiency of the management of charitable giving, thereby encouraging more investors to establish Bahamian structures to advance their charitable efforts.

Another important factor in managing a charitable trust is the actual management of the assets. The charitable trustee is responsible for ensuring that the trust assets are appropriately managed so that the capital and income meet the objectives of the particular trust. The trustee has a responsibility to manage or delegate management of the assets to a competent investment manager. The trustee outlines the investment policies for the charitable trust and collaborates with the investment manager (if delegated) to set the objectives with respect to the management of the portfolio. In this instance, the prudent investor rule applies and the trustee is obligated to review and monitor the performance of the investment manager to ensure that the objectives are being achieved.

Foundations: Bahamas makes history
Another vehicle that can be used for philanthropic and charitable purposes is the foundation. With the enactment of the Foundations Act (FA) 2004, The Bahamas expanded its list of financial products available to the outside global market, and made history by establishing itself as the first common-law jurisdiction to offer foundations, which historically have been a popular civil-law vehicle for wealth and estate planning. Recent amendments to the FA dispensed with the necessity for the appointment of officers. Instead, the appointment of a Foundation Council to govern the affairs of the foundation would suffice. In addition, the founder’s rights have been minimized to make evident that the founder does not have control over the assets of the foundation, but rather, the FA clearly states that the ability to control the assets of the foundation lie with the Foundation Council. Following the passing of the above amendments in 2007, our institution commenced the process of marketing the Bahamian foundation as a sound vehicle of choice to our clients. It is possible that in the not too distant future, this vehicle will be used not only as a tool for estate and tax planning, asset protection or preserving family wealth and confidentiality, but also as the vehicle of choice for establishing charities in addition to common charitable trusts.

In conclusion, philanthropy is a laudable concept that serves a great purpose in modern society. Philanthropic giving is becoming increasingly popular and many high-net-worth individuals are making provisions to support their charitable causes during and after their lifetime. For this reason, charitable trusts are being established and the role of the trustee is crucial in ensuring that the goals and objectives of charitable trusts are met. As stated previously, the trustee of a charitable trust may be faced with challenges in the management of the trust; however, if the trustee is prudent in the execution of his duties, these challenges can be overcome.

In summary, it is clear that The Bahamas has positioned itself as a premier jurisdiction for facilitating philanthropic activities. It is foreseen that as the notion of charitable giving continues to evolve, the country may introduce new initiatives, such as the creation of a Charities Commission, to enhance and provide for the effective management of charitable trusts as well as charities and non-profit organizations. In doing so, The Bahamas may be better placed to meet the needs of philanthropists.

Bio
Christian Coquoz
Christian Coquoz is managing director of Lombard Odier Darier Hentsch Private Bank & Trust Limited in Nassau, an affiliated company of Lombard Odier Darier Hentsch & Cie, the oldest private bankers in Geneva. Coquoz has been in the banking industry for over 30 years in Switzerland, New York, the Cayman Islands and The Bahamas, where he has resided since 1993. He serves as a director on the boards of several licensed financial institutions. He is also deputy chairman of the board of directors of the Association of International Banks & Trust Companies in The Bahamas, a director of the Bahamas Financial Services Board, and has served as a committee member of the Financial Services Consultative Forum.

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