Bahamas Asset Protection Trusts

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The Bahamas have become a popular destination for offshore trusts. How do they compare to domestic trusts, and what makes this jurisdiction attractive to foreign settlers?

The islands known as the Bahamas are located within the Lucayan Archipelago and are officially known as the Commonwealth of the Bahamas. Consisting of more than 700 cays, islands, and islets, the Bahamas are located in the Atlantic Ocean, just southeast of the state of Florida and east of the Florida Keys.

After gaining independence from Great Britain in 1973, the Bahamas has made great strides towards becoming a hub for sophisticated financial services. As their reputation has grown, many prestigious banks have opened branches or subsidiary companies on Bahamian territory.

What makes the Bahamas an attractive locale for asset protection?

Aside from the fact that there are no income, gift, or estate taxes in the Bahamas, this debtor-friendly Commonwealth also has a much shorter statute of limitations for fraudulent transfer claims against a settlor. The two-year statute of limitations in the Bahamas makes it a more attractive option than many domestic and foreign jurisdictions, often four years or longer.

Compared to other options for offshore asset protection trusts (APTs), the Bahamas’ legislation was updated in 2011, affording it several advanced features for protecting assets that do not exist in other jurisdictions. Notably, the Fraudulent Disposition Act of 1991 requires that any creditor seeking to prove a settlor’s willful intention to defraud must initiate proceedings in the Bahamas’ court system.

Accordingly, the creditor must show that the debt was owed at the time of the trust’s formation and that the trust’s very creation was to perpetrate this fraud. Meeting these requirements would not only be costly; if multiple beneficiaries are included in the trust, it would be nearly impossible.

Perhaps the most attractive element of a Bahamas jurisdiction for APTs is its shorter statute of limitations, also afforded by the Fraudulent Dispositions Act 1991. The law established that any such action must be started within two years of the date the asset was transferred into the trust. After this period expires, a creditor is no longer allowed to bring a fraudulent transfer claim.

Other features of a Bahamas Asset Protection Trust:

• No requirement for registration or recording the trust document or the identities of the settlor, beneficiaries, and trustee(s).
• Since no recording is necessary, the trust arrangements, or “due diligence” data, can remain confidential between Settlor and Trustee.
• Because a Bahamian Trustee is not required for a Bahamas-based APT, it can move the Trustee services to a secondary and private jurisdiction.
• A “protector of the trust” may be appointed to control the trustee and potentially remove and replace trustees.
• Unlike many other jurisdictions, the settlor of a Bahamas APT may be named as a beneficiary.

Who are the best candidates for a Bahamas Asset Protection Trust?

Anyone who has a high net worth, a high-liability profession, or invests in liability-generating assets is a target for opportunistic and frivolous lawsuits. The best candidates for offshore asset protection include healthcare professionals, celebrities, business owners, board members, or anyone who is perceived by the public as having millions of dollars in liquid wealth.

While virtual assets are unique in many ways, they are considered by the IRS to be a form of property. As such, crypto wealth is just as vulnerable as other assets to lawsuits, collections, and liability claims. Additionally, any individual who is substantially invested in cryptocurrency can take advantage of the protections offered by a Bahamas APT.

Offshore vs. Domestic Asset Protection Trusts

While it is possible to move assets into multi-tiered corporate structures in the United States or retitle them into a DAPT, a persistent plaintiff may find a way to prevail in court. Offshore trusts offer much higher asset protection for individuals and shareholders. Caribbean jurisdictions offer a debtor-friendly environment that is attractive to the U.S. and foreign investors.

What does it mean to have a debtor-friendly jurisdiction? 

While trusts governed by U.S. law may mirror foreign trusts in most respects, the primary difference is how the controlling jurisdiction handles claims against the trust, including predatory lawsuits. For example, the statute of limitations for such claims against a Bahamas APT is only two years, compared to a four-year statute of limitations offered in many domestic trusts.

In addition to offering a secure form of asset protection, offshore trusts can be structured in such a way as to allow the settlor and beneficiaries to avoid probate tax in estate planning, as well as most gift and income taxes.

Why choose a Bahamas APT?

The main reason high-net-worth individuals in the U.S. are more inclined to set up a trust in the Bahamas is its location, just southeast of Florida. A more convenient location allows settlers to meet their trustees, visit financial institutions, and appear less suspicious to claimants in civil litigation.

Due to its established banks and sophisticated financial system, the Bahamas is among the most popular offshore locations for asset protection. Not only will the Bahamas not recognize foreign judgments, but any new litigation against the settlor of a Bahamas APT must also file a claim in the Commonwealth within the two-year limitation period, hire local counsel, and transport witnesses. Most foreign creditors must post a substantial bond in the Bahamas as well. As a result, the trust’s very existence is often a deterrent against litigation.

Legal framework for Bahamian trust law

The origins of Bahamian trust law began with the Bahamian Trustee Act of 1893, which was based on English Common Law. Later legislation included the Trust Act of 1989 and the Fraudulent Dispositions Act of 1991.

The former (Trust Act of 1989) added the Choice of Governing Law, allowing Bahamian trusts to protect against forced inheritance claims that arise out of civil judgments in their home countries. It also makes Bahamian law the proper trust law, making it immune to foreign judgments.

Another provision of the 1989 Act was appointing a “protector of trusts”, or someone who can serve as a bridge between settlor and trustee. The protector has the power to remove and appoint beneficiaries and trustees on behalf of the settlor and receive information about the activities of the trust, allowing the settlor to have a greater level of control.

Over the past few decades, the Commonwealth has broadened its trust laws even further. Now known as the Trustee Act of 1998, Bahamian trust law took another major step toward improving the efficiency of wealth management.

Later legislative amendments to the 1998 Act were adopted in 2007, 2011, 2013 and 2016, further broadening its protections and level of confidentiality for foreign settlors. Today, all Bahamian trusts with non-resident beneficiaries, other than those that hold Bahamian real estate, are exempt from all taxes.

Bahamas Trust Structure

The formation of Bahamian APTs starts with placing the settlor’s assets in the trust and naming beneficiaries. A trustee, who may be a resident or non-resident of the Bahamas, may either hold the assets directly or through a holding company.

Bahamian trust laws also allow the trustee to be a corporation rather than an individual. However, if the trust is held by a Bahamas corporation, it must obtain a trust license from the Central Bank of the Bahamas. However, both foreign and domestic individuals serving as a trustee are not required to obtain a license. Due to strict confidentiality laws in the Bahamas, a licensed trust company may not disclose any information about the trust. Violation of these laws could result in severe fines or imprisonment.

Additional protections under Bahamas law

The Bahamian trust structure may be used even when all assets are located outside of the Bahamas and both settlor and trustee live in other countries.

If the settlor’s assets are first transferred to a Bahamas holding company before being transferred to the trustee, another layer of protection is added. This is because Bahamian law does not allow a creditor to challenge the transfer of a holding company’s shares to the trustee.

US Tax Laws and the Bahamas APT

While the IRS does not forbid foreign trusts, they still want to make sure the settlor is not attempting to evade the IRS. Reporting for offshore accounts includes the completion of certain compliance forms, the failure of which could result in fines and criminal penalties. Demonstrating the intent to remain compliant with IRS guidelines will also help disprove any claims of a fraudulent transfer.

Conclusion

Predatory lawsuits against high-risk professionals and other high net-worth individuals are more common than ever in our increasingly litigious society. While many of these suits are frivolous and opportunistic by nature, others pose a more significant threat to an individual’s assets.

A Bahamas asset protection trust offers more than just protection from creditors; it is also an excellent estate planning vehicle. An individual’s assets can be placed in a trust for the settlor’s heirs and held in perpetuity for future generations. Because no wills are required, a trust allows beneficiaries to avoid costly and time-consuming probate proceedings. If the trust dictates, the beneficiaries simply take ownership of all the assets, or the assets will continue to be held in the trust for future generations.

Anyone looking to retain their wealth, protect assets from predatory lawsuits, and simplify estate planning would be wise to consider a Bahamas APT. These offshore asset protection vehicles 100 percent foreign ownership, no taxes, privacy, superb asset protection, an English-speaking jurisdiction, and they can be formed in one day.

Resources:

• US Department of State: 2020 Investment Climate Statements: the Bahamas
• Table of Contents for Asset Protection Strategies
• Asset-Protection Trusts
• Behind the Corporate Veil: US Tax Court
• Protection Assets from Creditors Legally, Ethically, and Morally
• Offshore Asset Protection Trust: Prudent Financial Planning Device
• Foreign Trusts
• US Position on Offshore Tax Havens
• Give the People What They Want? The Onshoring of the Offshore
• Use of Trusts and LLCs in Asset Protection
• International Trust and Estate Planning: Asset Protection Trusts
• US Senate Committee on the Judiciary: Fighting Financial Networks Through Transparency
• What’s is the U.S. Position on Offshore Tax Havens?
• Asset Protection Trusts – Foreign Asset Protection Trusts
• Case # 1 Analyzing Bahamas Asset Protection Trusts