Liza Harridyal-Sodha examines Barbados Foundations and Private Trust Companies for HNWIs and affluent families.
When affluent individuals and families ponder on their estate planning needs; asset management and protection; the preservation of wealth; tax planning and business continuation and all other such ideas that enter the mind of the wealthy, the usual structure recommended by wealth management professionals has been the Trust. A Trust is administered by a trustee who has title to all of the assets and usually owns the shares of a privately held underlying company. The company can own a variety of assets ranging from bank accounts to real property to chattels, or may have the right to receive income from a third party. Recently, Barbados has expanded its offerings to include alternative trust structures, as a means of increasing its ability to attract a multiplicity of new wealth management business, while meeting the changing needs of its existing clientele.
Trust management has been a considerable activity in Barbados for more than three decades. Trusts were used primarily by wealthy individuals from the major common law countries, but it is now accepted as a major vehicle for asset protection. The International Trusts Act Cap. 245 gave Barbados a modern, comprehensive, business-oriented trust regime which has proven attractive, particularly to corporate users. As a trendsetter, Barbados has also amended its Trustees Act Cap. 250 to provide for reserved powers to settlors, which basically bestows the settlors the legal right to make certain decisions affecting the trust property and in the administration of the Trust. This new, wider market-place for trusts is not necessarily interested so much in effective tax planning, but also in the efficient management of wealth in a more general sense. As such Barbados remains committed to being a reputable, innovative and world class jurisdiction that will facilitate new and emerging products through progressive legislation.
Barbados in its continued efforts to attract diverse and spontaneous investment has enacted legislation which allows for the formation of Foundations and Private Trust Companies (PTCs). Barbados Foundations are governed by the Foundations Act, 2012 and can best be described as a fund which has been endowed by its founder (called the settlor in the Trust scenario) to be utilised for persons or purposes, as detailed in its charter. Unlike a traditional Trust, a Foundation is a legal entity that has no owners, but instead, is a legal person that can bring and defend legal action and has unlimited capacity to contract on its own behalf. Under the Foundations Act, a Barbados Foundation will come into existence after being registered in the Registry of Corporate Affairs in the manner specified. A foundation council is appointed to make administrative decisions consistent with the by-laws of the Foundation. The fiduciary duty of the foundation council is to the Foundation itself, whereas the trustees of a Trust owe a duty of care to the beneficiaries only. Assets placed or transferred to a Foundation become the property of the Foundation and therefore are independent of the founder or the beneficiaries. The duration of the Foundation is stipulated in the Foundation’s charter and thus the Foundation can exist in perpetuity or have a finite period as defined in its charter.
In relation to Foundations, it is of significance that Barbados has recently concluded various double taxation treaties with several Central and Latin American countries, in which there is no practice of utilising trust structures under civil law regimes. It is anticipated Barbados will attract more international business using Foundations as the answer for affluent individuals, from civil law jurisdictions, who want to manage wealth in an internationally respected jurisdiction. Foundations will afford these individuals the ability to transfer ownership to a separate legal entity while still retaining control on how the assets are managed and distributed.
Barbados PTCs are governed by the Private Trust Companies Act, 2012. PTCs were borne out of the necessity for greater control by families over their trust and have become a very attractive option. This unique type of trust company will complement an already expansive financial services landscape and will provide asset management services within an existing international business framework. The settlor and family can legally exercise greater control over the administration of the assets of the trust. Such flexibility is favored over the traditional trust structures, where the trustee is the legal owner and custodian of assets, and the beneficiaries are subject to the total and complete discretion of the trustee, who must approve all actions. Such flexibility is favoured, as it creates the desired buffer of confidentiality while protecting the validity of the underlying trust.
After incorporation of the PTC under the Companies Act Cap.308, and obtaining the relevant license, PTCs will stand in a preferential tax and domicile position, and will be able to offer the structuring of inheritance planning to high net worth individuals and their families. A Barbados PTC is required to appoint a Special Director, has a Registered Agent and maintains its registered office at the office of the Registered Agent. A Registered Agent is essentially a licensed trust company or a licensed service provider in Barbados. The Special Director has to be a resident of Barbados and is responsible for the general administration of the PTC. A PTC shall not conduct any trust business other than connected trust business, which essentially means that the contributors of the trust must be connected persons. The list of connected persons is exhaustive and ranges from spouses, parents, children to stepchildren and in-laws.
The ‘modus operandi’ of the PTC will allow the client to make administrative changes as necessary, without actually affecting the trustee position; allow family members to customise the trustee service to meet their evolving needs; as well as allow them to be actively involved in key investment strategies and decisions. Such intimate involvement does not exist within professional trustee services, and in fact if a change of trustee is required it is usually a lengthy and expensive process. Good governance practices will be key to the proper administration of PTCs as there are key risks that have to be mitigated or removed outright. These range from the concentration of power of the Special Director, to the more practical considerations, such as income tax issues and generational representation that may arise if a trust is contested. Additionally, the directors will have to be prudent in their decision making to ensure that the beneficiaries’ interests are protected.
While initial start up costs for PTCs will include the usual practitioner fees and general administrative costs, the client of PTCs will enjoy the flexibility and advantages of personal control. In addition, the client receives peace of mind, that they are actively involved in the management of family assets, which can include succession planning; being able to give greater assurances of consensus after death of the settlor and the tailoring of investment policies to meet family needs.
In a world where flexibility and innovation are essential to economic survival and success, Barbados continues to seek to advance its position as a leading international financial centre, through the exercise of modern legislative prowess. The enactment of legislation to govern PTC and Foundations as alternatives to asset protection structures have enhanced the products available to wealth management practitioners who need to be prepared for the changing needs and fortunes of clients and civil law regimes worldwide.
Liza Harridyal-Sodha is the Principal of Harridyal-Sodha & Associates. A law practice offering services in Company and Commercial matters, formation of Banks & Insurance Companies, Environmental Law, Tax Planning, Conveyance, Trademarks & Patents, Employment Law and the law of Trusts. Liza is an Executive of the Society of Trust and Estate Practitioners (Barbados Branch), a Director of the Barbados International Business Association, and the Deputy Chair of the Joint Working Policy Group which advises the Ministry of International Business in Barbados.