Barbados, responding to many requests from overseas investors, and in a continued attempt to improve its image as a top Offshore Domicile, has recently passed an International Trusts Act. The Act is still awaiting Proclamation before it comes into force.
The International Trusts Act (the Act) only applies to an International Trust (IT), defined in section 2 of the Act as a Trust (I) in respect of which the settlor is resident outside of Barbados at the time of creation of the Trust or of addition of new property to the trust (ii) at least one of the Trustees is resident in Barbados; (iii) no beneficiary (other than those specified) is resident in Barbados and (iv) the trust property does not include any immovable property or interest in same situate in Barbados
Prior to the Act, the concept of a Trust was well embodied in the Barbados legal system which is based on the English common law system. The history of the development of the Trust through the use of Equitable Principles in the Courts of Chancery in England was paralleled in Barbados which as a colony of England to 1966 received English common law and equitable principles as part of its law.
Section 3 of the Act defines a trust by describing its characteristics in lines similar to Article 2 of the Hague Convention on Trusts.
(A)Separate fund for Assets of Trust
(B)Title to Assets held in name of Trustee
(C)Trustee has the power and duty to manage
(D)Trustee is accountable for management and administration of assets of the Trust.
The Act stresses that the expression "Trust" means the legal relationship created when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.
The Act applies to trusts created, which can only be in writing, after the commencement of the Act or to those created before commencement if the Trust has all the characteristics of an International Trust. An IT is irrevocable although it is a voluntary trust unless it contains a power of revocation.
With the exception of a purpose trust established exclusively for charitable purposes a trust terminates on its hundredth anniversary of the date of its creation unless terminated sooner. The rule against perpetuities does not apply to an International Trust.
The Act defines the proper law of an International Trust. This is a laudable attempt to remove the uncertainties caused by the lack of common law authorities on the point in an area which often sees issues of conflict of laws arise.
Section 8 provides the definition:
(a)the jurisdiction expressed by the terms of the trust as the proper law, or if not so expressed
(b)the jurisdiction intended by the settlor to be the proper law, or if not so expressed or intended
(c)the jurisdiction with which the trust at the time it was created had the closest connection
The Act also makes provision for the proper law of the trust to be changed from the law of another jurisdiction and for severable aspects of the trust e.g. the administration of the trust to be governed by a different law from the proper law.
The Act contains guidelines for determining the proper law in accordance with (c) above. The concept behind these guidelines is similar to that for determining the putative proper law of a contract.
One of the more innovative features of the Act is the provision for establishment of purpose trusts - i.e. a trust established for a purpose rather than for persons. As such Trusts have no beneficiaries who could enforce the Trust, provision is made for an Enforcer by the name of a Protector to be appointed as a guardian of the Trust. The Act is flexible in that it allows for the original purposes for which the Trust was established to be substituted where the original purpose is no longer possible as long as the substituted purpose is not contrary to the spirit and meaning of the settlement..
A non charitable Purpose Trust will be valid as long as it is specific, reasonable and not immoral or contrary to public policy or law appoints a Protector and specifies how surplus assets are to be distributed upon termination of the Trust.
It is envisaged that creative uses will be made of such Trusts which coupled with Barbados' growing network of Double taxation treaties could lead to their use as an effective means of tax planning. Use of such Trusts can be for:
(A) Holding shares of companies
(B) Corporate financing - protecting assets held by a subsidiary as security for a lender
(C) Holding voting stock in companies
As stated above, a Protector is appointed as the enforcer of a Purpose Trust. The Trust instrument must provide for his appointment and that of a successor. Should a Trust not have a Protector for any reason or should the Protector not be functioning one may be appointed by the Court.
The Act makes it clear that a Protector of an International Trust is not a Trustee thereof and outlines the powers that may be conferred on him - (See section 26 of the Act which is reproduced in last month's article).
Effect of Foreign Law - Forced Heirship
Once a settlor has capacity as outlined in section 15.
For the creation of an IT then any questions arising with regard to the Trust are governed by the law of Barbados without reference to the law of any other jurisdiction.
Capacity is determined as follows
(a)InterVivos Trust of Movable Property - Capacity under Barbados law
(b)Testamentary Trust of Movable Property - Capacity under law of domicile
(c)Trust of Immovable Property - Capacity under the law of jurisdiction in which the immovable property is situate
The Act in addition to disallowing claims based on forced heirship rules also does not recognize the laws of another jurisdiction in respect of
(a)The personal and proprietary effects of marriage
(b)The protection of creditors in matters of bankruptcy; unless there are corresponding laws in Barbados
The International Trust Act does make provision for the utilization of Trusts as a means of Asset Protection or Creditor Protection by this rejection of foreign law.
Barbados has however never maintained itself as a no tax haven or as an Aggressive Creditor Protector Jurisdiction and it is therefore no surprise that the Act contains stringent provisions against the fraudulent disposition of property into a Trust so as to avoid creditors
Section 20 provides
(1)Subject to this Act, every disposition of property made with an intent to defraud or at an undervalue shall be voidable at the instance of a creditor thereby prejudiced.
(2)The burden of establishing an intent to defraud for the purposes of this Act shall be upon the creditor seeking to set aside the disposition
(3)No action or proceedings shall be commenced pursuant to this Act later than three years after the date of the relevant disposition.
To set aside the disposition, the creditor must exist at the time of the relevant disposition to the Trust, but he still has to prove that the transfer was with the intent to defraud. Such a claim must be made within three years.
At the beginning of this Article it was pointed out that the Act was not in force as it awaits proclamation.
It is our understanding that proclamation is being delayed to allow for amendments which will eliminate one or two potential problems. Such amendments may
(a)Subject International Trusts to a low rate of taxation and thus allow them to benefit under the provisions of the Canada Barbados Tax Treaty which does not embrace Entities not subject to tax in either country.
(b)Change the point of time from which the time limit (as quoted in section 20 (3)) runs for a challenge by creditors.
As the Act allows for the transfer of Trusts from another jurisdiction the question has been raised as to whether in such a case the 3 year time limitation runs from the time when the Trust was established in that jurisdiction or from the time the Trust was transferred to Barbados.