Executive solution - The new Bahamas Executive Foundation

Thursday, 01 October 2009

A problem often encountered in setting up and running wealth preservation structures is deciding who is to be the trustee, protector or enforcer. Wealth preservation structures have evolved over the past decade to meet the desire of wealthy founders to have their family members and trusted advisors in key decision-making roles. Private Trust Company (PTC) structures have become increasingly popular, their attractiveness lying in the founder’s ability to appoint trusted people as the directors, who then exercise the dispositive powers of the trust. These people are often better placed than professional trustees to act in times of family dispute, given their knowledge of the family and their values.

The use of a PTC, however, raises the additional problem of who should own its shares. There is currently no entity best suited to this function. The traditional PTC ownership model of using a purpose trust requires a trustee and an enforcer, which is often a professional trustee, taking ultimate control over the structure away from the family and trusted advisors. An individual shareholder raises issues of succession and control. Using a company requires someone to hold the shares or guarantee and the existing foundation laws worldwide either tend to require a beneficiary or have onerous regulatory requirements for this limited shareholder purpose.

The Bahamas solution

As a solution to this problem, the author has been involved in designing a new Executive Foundation specifically to carry out executive functions in wealth structuring. These executive functions are powers or duties of an executive, administrative, supervisory, fiduciary or office holding nature. They include such roles as enforcer or protector of a trust or the shareholder of a PTC. If further legislative and regulatory amendments are made in the Bahamas once the new Act is passed, the Executive Foundation even has the potential to act as a trustee.

The Executive Foundation differs quite substantially from existing foundations in the Bahamas, Jersey and worldwide, which are designed to hold assets beneficially for persons in succession or for a purpose (whether private or charitable) or both, rather than to perform executive functions.

The enabling legislation for the Executive Foundation concept has now been approved in principle by the Bahamas Financial Services Board, the Bahamian Attorney General and the Governor of the Central Bank of the Bahamas. Subject to Parliamentary approval, the new Act is expected to become law by the Autumn. The Bahamas will be the first international financial centre to introduce legislation of this kind.

Advantages and characteristics of the Executive Foundation

The Executive Foundation simplifies wealth structures that utilise trusts by stripping away unnecessary, complicated and costly layers. It also institutionalises the roles of enforcers, protectors, asset allocators and other advisors, promoting continuity and stability within wealth structures. There has already been considerable interest in the new vehicle from families and their advisors, with the cost of drafting and incorporating an Executive Foundation into a wealth structure expected to pay for itself within a short period of time.

As a self-owned, perpetual entity with a restricted purpose, an Executive Foundation has no shareholder, no enforcer and no beneficiaries. Further, it is only permitted to hold such assets as it reasonably requires to carry out its executive functions and has no minimum share capital requirements.

The Act enables an entity to be formed that not only allows a founder to choose the officers they consider best-suited for the function, but also protects them from liability as if they were directors of a company with limited liability. As a quasi-corporate vehicle, the Executive Foundation (through its articles) facilitates the application of best practice corporate governance principles, which are crucial for lasting and workable structures, particularly those holding operating businesses.

Another feature of the Executive Foundation is that its officers do not need to be disclosed. This is very attractive to families who wish to preserve anonymity and to keep their financial matters confidential. Each Executive Foundation does require a disclosed Bahamas Agent.

With many wealthy families looking to restructure and diversify their assets for better protection as a result of the economic downturn, and the increasing need for family owned businesses to show proper corporate governance at operating and holding level (or face reduced credit or equity ratings), the addition of the Bahamas Executive Foundation to the wealth structuring toolbox is timely.

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Rose Chamberlayne

Rose Chamberlayne is a Solicitor at Lawrence Graham (LG) LLP.

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