The Effective Estate Plan

We’ve had continuous talk about the pandemic, a ‘crypto winter,’ an EU ‘uncooperative’ tax list – from which we’ve been removed, strangely, multiple times – and FTX. Yet The Bahamas rapidly digitised its services and encouraged hybrid working. Bitcoin’s price rose over 100 per cent year-to-date. The EU possibly failed to use up-to-date data with its list. And D3 Bahamas, with world-leading speakers and over 800 participants covering the future of digital assets, sent FTX to a distant, rogue memory.

The aforementioned edifies that the heart of The Bahamas is an island of stability. That is both the essence and the reality of The Bahamas. During the coronavirus pandemic in 2020, the government of The Bahamas passed the Financial and Corporate Service Providers Act, the new Banks and Trust Companies Regulations Bill and The Arbitration (Amendment) Act 2023 and The International Commercial Arbitration Act 2023. In the brief years since, our nation has reformed laws surrounding economic substance in line with new international standards, and quickly pressed on with automatic exchange of tax information following the EU and the OECD.

Looking forward to the future, The Bahamas aims to become a hallmark of seamless intergenerational estate planning following the Bahamas Powers of Attorney Act, a well-drafted paragon from the 1990s, and the Digital Assets and Registered Exchanges Bill, 2023. The central theme here remains a constant mindfulness of the stable and foundational basics. Estate plans entail very long-time horizons, which are best served by at least some ‘risk-on’ investing.

Why desire one and eschew the other, when textbooks have constantly advocated the opposite? This is where the legal integrity and prowess of The Bahamas comes into play. Why our island nation of stability is now a champion for estate planning requires a brief recap on the breadth of Bahamian law.

Many Acts, One Nation

Effective trust and financial services legislation continues to be at the forefront in The Bahamas’ parliament. In order, we have the:

1. The Arbitration (Amendment) Act 2023
2. The International Commercial Arbitration Act 2023.
3. Fraudulent Dispositions Act (1991)
4. Trustee Act (1998)
5. Banks & Trust Companies Regulation Act (2000)
6. Purpose Trust Act (2004)
7. Banks & Trust Companies (Private Trust Companies) Regulations (2007)
8. Commercial Entities (Substance Requirements) Act 2018
9. Investment Funds Act (2019)
10. Banks & Trust Companies Act (2000, 2020)
11. Financial and Corporate Service Providers Act (2000, 2020)
12. Digital Assets and Registered Exchanges Act (2020, 2023; DARE Act).

While this article cannot go into the details of each act, we can clearly say that there is an enhanced and thoughtful framework for compliant financial services, prioritising a global outlook, inclusive of entrepreneurs seeking to responsibly expand into fiat- and crypto-oriented opportunities.

The Commercial Entities Act establishes the requirements for relevant entities engaging in income-generation activities within The Bahamas. The Investment Funds Act improves the regulatory framework for Bahamian investment funds, notably enabling the appointment of international funds administrators. The Banks & Trust Companies Act (2020) comprehensively modernises the previous Act of the same name while providing The Central Bank of The Bahamas with enhanced and effective powers. The Financial and Corporate Service Providers Act performs the same essential update, while the DARE Act leapfrogged The Bahamas as a world-leading destination for digital asset entrepreneurship.

The 2023 Bill of the latter DARE Act, particularly following FTX’s short-lived crypto winter, specifically highlights minimum requirements for ensuring investor safety in the daily operations of a digital asset exchange, whether for trading or staking. Such standards do not read as novel, since they were mentioned in the 2020 version, but seek to clarify beyond any doubt the requirements expected by the government of The Bahamas. Staking, which rose to prominence after many years of low interest rates, had received implicit and wide acceptance as a smart method of passive income, but did not receive commensurate explicit regulations on staking protocols and investor protections.

At the heart of all this legislation remains just that: Investor protection, investor growth, sustainability. The Bahamas ensures compliance with international standards, whether with economic substance, exchange of tax-related information, or managing an asset class wholly new to the age-old realm of financial services. Therefore, this island nation also upholds the highest expectations when fighting against money laundering, terrorist financing, and other known risks seeking to combat financial crime. The Bahamas was only the second jurisdiction in the region to be largely compliant with all forty of the Financial Action Task Force’s (FATF) recommendations.

We can say we excel alongside the tripartite formula of international excellence, financial safety, and legal pedigree. However, why are any of these necessary for estate planning? What does crypto have to do with it?

The Changing Inheritance

According to Cerulli Associates, over USD 70 trillion is set to change generations within the next 25 years in the United States alone. According to a Forbes survey, more than 70 per cent of inheritors immediately fire their parents’ financial advisor and, according to The Williams Group, 70 per cent of wealth transfers fail. Putting it together, wealth advisors – no matter where they are – have an expensive problem.

Intergenerational estate planning cannot happen if there is no second generation. Wealth advisors lose trust alongside their clientele, perhaps for a variety of reasons, but one key detail from another Forbes report states that 60 per cent of inheritors simply don’t know their advisors, while others described them as ‘out of touch.’ Obviously, our goal as advisors is to keep ‘in touch’ and adapt to the preferences and concerns of the incoming generation. This also requires a broad brush of wisdom, to know the family legacy and the direction in which things are going.

The full gamut. That is the unique challenge overcome with and defined by the effective estate plan.

At least for Deltec, effective means innovative – not in any ‘sly’ connotation of the word, but holistically. The question is: Are we able to holistically serve each and every family, treating them as unique? Can we avoid the ‘cookie cutter’? There are two elements to the holistic approach, embracing both certainty and volatility.

Embracing Certainty

Certainty here refers to legal certainty. Wills, gifts, structures, and philanthropy, all form essential components of a greater whole, though no two wills or gifts will be the same. Structures have different meanings and uses for different families. Further, drafting can be done well, or poorly, with severe unintended consequences. Here lies the ‘wisdom’ element inherent to estate planning.

It’s vital to provide certainty for the generations on both sides of the wealth transfer. The will should account for three generations, gifting should remain aware of tax thresholds, and while structures can come in more colours than the rainbow, they all have specific purposes. For example, irrevocable trusts are distinct from charitable trusts, and The Bahamas is unique, with its asset protection trust having only a two-year statute of limitations since 1991. Philanthropy, when done right and in a legally organised manner, avoids waste. Using a competent and internationally-minded jurisdiction such as The Bahamas helps to ensure that income is delivered where intended.

Put another way, using a competent and internationally-minded jurisdiction such as The Bahamas creates legal certainty. It creates the foundation for the next generation and for knowing where things will go despite the turbulence of the world.

Embracing Volatility

Volatility here refers to market volatility. Without volatility, there stands little in the way of growth – since nothing is moving! The objective becomes how to use volatility to your advantage. This is where understanding time horizons, expense requirements, and portfolio composition comes into play.

The more time given, the more risk that can be allocated, and the more expense planning becomes necessary. As another example, the Yale endowment fund returned 0.8 per cent in 2022 when the S&P fell by 19.6 per cent. Yale publicly documents its eschewing of ‘traditional’ asset classes in favour of leverage buyouts, venture capital investment, and absolute return strategies, among others. What do all these strategies require? Time.

The art of volatility feels like a difficult one to master, yet it remains entirely possible so long as there is a stable structure underpinning growth. Crypto and blockchain enter the frame given the immense potential its future holds. Whether you love or hate it, the five-year performance of Ethereum currently stands at over 800 per cent.

On Future-Proofing

The Bahamas demonstrated its modern legal prowess by quickly revamping its legislation concerning digital assets in the wake of unprecedented and resilient growth. For example, Boston Consulting Group predicts that tokenised digital assets will form a USD 16 trillion market by 2030. That means growth. It also means volatility.

In my mind, it was therefore an incredible display of commercial acumen, prudence, and foresight to have prioritised the ongoing public-private partnership supporting DARE, and the recent success that was ‘D3 Bahamas.’ This landmark event for The Bahamas, covering the broad umbrella of Web3 and Fintech, welcomed over 800 innovators, leaders, entrepreneurs, and thinkers – some attendees hailing from as far as the UAE, Hong Kong, and Uruguay.

This is what defines the unique Bahamian advantage: Embracing responsible innovation and connecting entrepreneurs with eager investors in a jurisdiction holding a legal history of over a hundred years. The first law firm opened its doors here in 1903, and the first foreign bank in 1908.

There is no reason for that success to change – just the opposite.

References:

1. https://grahamthompson.com/wp-content/uploads/2020/03/Chambers-and-Partners-BAHAMAS-Investment-Funds-Guide-2020.pdf
2. https://clearviewpublishing.com/wp-content/uploads/2022/09/BahamasMiniEdition3Report2022.pdf
3. https://bfsib-bahamas.com/asset-management.html
4. https://www.mckinney.com.bs/wp-content/uploads/2022/03/2021_economic_susbtance_Bahamas.pdf
5. https://www.deltecbank.com/wp-content/uploads/2023/08/Strategies_for_Turning_Heirs_into_Clients_Whitepaper_Aug_2023_v2.pdf
6. https://dilendorf.com/resources/bahamas-asset-protection-trusts.html
7. https://www.coindesk.com/business/2022/11/10/ftx-digital-markets-assets-frozen-by-bahamian-regulator-bloomberg/
8. https://www.forbes.com/sites/davidrae/2022/06/23/4-reasons-to-fire-your-parents-advisor-when-receiving-an-inheritance/#:~:text=Research%20suggests%20that%2070%20to,who%20worked%20for%20their%20parents.
9. https://thefinanser.com/2023/10/tokenized-digital-assets-will-be-a-16-trillion-market-by-2030#:~:text=For%20example%2C%20Boston%20Consulting%20Group,%2416%20trillion%20business%20by%202030.

Paul Winder
Paul Winder is the Global Head of Wealth Planning at Deltec Bank & Trust Limited, specialising in Wealth and Estate Planning, Fund Administration, Tax Planning & Structuring. Paul is a Former Chairman of The Bahamas Financial Services Board (BFSB), past Chairman of The Bahamas branch of the Society of Trust and Estate Practitioners (STEP), and a member of the International Tax Planning Association (ITPA).