Volume VI, Number 3 – August 1997
© Donlevy-Rosen & Rosen, P.A.
INTRODUCTION. With this issue we continue our periodic review of selected offshore jurisdictions. As indicated by the above subtitle, in this issue we will review the Commonwealth of the Bahamas (“the Bahamas”).
BACKGROUND. Discovered by Christopher Columbus in 1492, the 700 islands of the Bahamas stretch nearly 800 miles in the Atlantic Ocean. The islands are east of Palm Beach, Florida, and north of Haiti. The capital, Nassau, is located on New Providence Island, where nearly half of the Bahamian people live. Although the Bahamas gained its independence from England in 1973, it is still a member of the British Commonwealth, and its Head of State, the Governor-General, is selected by the British Monarch. The Bahamas, an English-speaking common law jurisdiction, has adequate communications facilities and professional services, including banking. The Bahamas is considered to be politically stable, despite allegations of corruption that led to the defeat of a long-standing government in 1992, and the linking of the islands to drug crimes. There are no tax treaties in force with the United States or any other country. Nonresidents transacting business in currency other than Bahamian dollars are free of exchange controls.
IMPORTANT LEGISLATION & RAMIFICATIONS. Like most Caribbean jurisdictions, the Bahamas is a party to the Mutual Legal Assistance Treaty (“MLAT”) with the U.S. and Canada. MLAT requires cooperation in the investigation and prosecution of, and the providing of information regarding, certain criminal activities, including fraud, drug trafficking, and money laundering. While MLAT does not cover offenses that are purely tax related, it is very broad in regard to the exchange of information as to “fraud”, “laundering,” and “violations of law relating to financial transactions.”
ASSET PROTECTION LEGISLATION. In 1991, by the implementation of the Fraudulent Dispositions Act (“FDA”), the Bahamas joined the offshore jurisdictions offering asset protection legislation.
In past issues of APN (Vol. I, No. 5, and Vol IV, No.4) we have reviewed the fraudulent transfer laws generally in effect in the United States, wherein if a transfer is found to be fraudulent as to any creditor, the entire transfer may be undone. The FDA repealed the 1571 Statute of Elizabeth, which rendered void ab initio any transfer found to be fraudulent as to present or future creditors. Under the FDA, only a creditor whose obligation existed at the time of the transfer and whose existence was known to the settlor at the time of transfer has standing to complain. That creditor must prove that the transfer was made “at an undervalue” and with the intent to defraud that particular creditor, who was actually prejudiced by the transfer. If the creditor meets this burden of proof, the transfer will be avoided only as to the amount of the debt owed to the defrauded creditor. The statute of limitations for challenging APTs is two years from the date of the transfer.
The FDA, together with the Perpetuities Act, 1995 (which fixed the life of a trust at 80 years), offer less protection for a settlor-beneficiary than the laws of the Cook Islands and Anguilla (See APN, Volume V, No.1 and No.2). For example, the laws of the Bahamas do not specifically permit a settlor to create, and to be a beneficiary of, his or her spendthrift trust. In addition, the troublesome doctrine developed in some common law jurisdictions by which a trust may be declared invalid if the settlor retains too many controls over the trust has not been statutorily renounced in the Bahamas, as it has been in the Cook Islands. Although a proposed Trustee Act 1995 would provide for a trust protector, there is currently no statutory authority permitting the settlor to be the trust protector. Therefore, caution is advised in establishing a Bahamian trust where the settlor will retain or be able to exercise any powers over the trust or trustee. This would indicate that the settlor-client should not be the protector of a Bahamian trust.
OTHER IMPORTANT LEGISLATION. Under certain circumstances, it may be important for an APT to be able to “move” to or from its original situs jurisdiction. The Bahamian legislation fully recognizes and implements this requirement by, among other things, allowing a trust to redomicile to the Bahamas. The statute, like that of Anguilla, does not specifically permit a retroactive application of Bahamas’s protective trust laws (as the Cook Island’s statute does), and since there is as yet no case law on point, whether protection can apply retroactively is unclear.
A proposed Trustee Act 1995 would enable persons having an interest in a trust (such as its beneficiaries) to cause its terms to be altered.
Some settlors may find Bahamian laws to be a sufficiently formidable obstacle to a creditor’s attack on a properly structured and implemented trust, because Bahamian courts will not give effect to a judgment of a court of another jurisdiction. However, in the Bahamas, a settlor’s bankruptcy within 10 years of a transfer to a trust may result in the trust being invalidated. The bankruptcy law puts the burden of proof on a settlor or the beneficiaries to prove that the settlor was solvent at the date of the settlement of the trust, and at each transfer to the trust.
Finally, for those persons transferring community property to an APT, Bahamian law does not specifically preserve the community property nature of the assets, thus jeopardizing the “double” estate tax step-up in basis realized by residents of our community property states.
A DISTURBING RULING. In 1995, the Bahamian Supreme Court granted an ex parte application for a Mareva injunction and disclosure order, which appeared to open new avenues of attack for future commercial plaintiffs, and in certain instances to shift the burden of proof of ownership of assets in an offshore trust to the settlor-defendant. A discussion of that case, now decided on appeal, will appear in a future issue.
CONCLUSION. The Bahamas is less than an ideal jurisdiction for the establishment of an APT.