The passage of the International Trust Act (ITA) of Barbados in 1995, heralded a maneuver by the Barbados government to, through its offshore legislation use the concept of the trust to allow individuals the freedom to dispose of assets that might otherwise be indiposable by ordinary means.

The Act does not seek to redefine the common law governing the operation of trusts its aim is to facilitate the use of the trust as a vehicle for investment and estate planning.

CREATION AND OPERATION

An international trust may only be created by instrument in writing and is irrevocable unless the trust instrument contains a clause which declares the trust to be revocable.

Under the ITA neither the settlor, (the person creating the trust) nor any of the beneficiaries unless the beneficiary is an exempt insurance company, an international business company, a charity or a person specified by the Minister may be permanently resident in Barbados or resident there at any time when an addition of property is made to the trust.

The trustee or trustees must be a designated person. Designated persons are classified under the legislation as Attorneys-at-law, Chartered Accountants, Trust Companies, a company licensed under the Financial Intermediary Act, an Offshore

Bank or any other person as the Minster of Trade may designate. At least one of the trustees must be resident in Barbados. It is permissible for an international trust to have only one trustee.

The property which comprises the trust must not include immovable property in Barbados, nor any interest in such property.

An international trust with the exclusion of an exclusively charitable trust automatically determines on the expiration of 100 years after its creation.

A copy of the trust instrument as well as any instrument amending or supplemental to it as well as a register which sets out the name of the settlor, summarizes the purposes of the trust, and names the protector of the trust as well as documents which show the true financial position of the trust, must be kept in Barbados.

All documents belonging to the trust are subject to a duty of confidentiality and are not available to the public.

GOVERNING LAW

International trusts are not automatically governed by Barbadian law, the trust instrument itself may expressly provide for the trust to be governed by the law of a specific jurisdiction. If no provision for this is made then the trust will be governed by the laws of the jurisdiction intended by the settlor to apply, or the law of the jurisdiction with which the trust at the time of its creation had the closest connection.

The law of the trust may validly be changed from the law of one jurisdiction to another, but only if the laws of the new jurisdiction recognize the validity of the trust and the interest of the beneficiaries.

BENEFITS OF THE USE OF THE INTERNATIONAL TRUST

The benefits of using an international trust may be highlighted as being:

PURPOSE TRUSTS

The Act facilitates the establishment of purpose trusts, that is a trust established to fulfil a specified purpose and which need not have an ascertainable beneficiary. English common law prohibits the establishment of such a trust, and it would normally fail for lack of certainty.

The utilisation of purpose trust is rigidly guarded. The purpose for the establishment of the trust must be specifically stated. and must be reasonable and capable of fulfilment, and cannot be immoral, unlawful or contrary to public policy.

FORCED HEIRSHIP LAWS AVOIDANCE

An international trust may be utilised to avoid the operation of certain aspects of the law of succession . Some jurisdictions place limits on persons testamentary freedom. The international trust may be used to protect and dispose of assets which under the operation of the succession laws of the settlor's domicile would automatically go to pre-determined beneficiaries.

THE RULE AGAINST PERPETUITIES

Under English common law it is not allowable to have a trust which will exist for an indefinite period, this being shortly stated is the rule against perpetuities. The ITA has abolished the application of this rule expressly, therefore allowing for the establishment of trust for a period which need not be stated, but which of course will automatically terminate on the hundredth anniversary of the establishment of the trust.

OTHER BENEFITS

The ITA provides for numerous exemptions from the payment of taxes in Barbados. For instance beneficiaries who are not resident in Barbados pay no tax on allocations to them of trust income or on distributions of capital, additionally income and gains to the international trust including income from foreign securities are exempt from income tax. International trusts are also exempt from the payment of ad valorem stamp duty and indirect tax. The provisions of the exchange control act and the Succession Act do not apply to international trusts.

PROTECTION MECHANISMS

Due to the very nature of an international trust, it is arguable that such a mechanism may be used to defraud creditors. The ITA specifically addresses this issue in section 20(1). It provides that where property is conveyed to a trust with the intent of defrauding the creditors then that disposition is voidable at the instance of the creditor defrauded. The burden of proving that the purpose of the disposition was to defraud the creditor rests on the creditor. No action may be brought to recover property which was alleged to be the subject of a fraudulent disposition, after more than three years after the disposition.

A similar provision to this came under scrutiny in the Cook Islands case of South Orange Grove Owners Association, First Appellant et al v. Orange Grove Partners, First Respondent et al, the section under scrutiny was section 13 of the Cook Islands ITA.

In that case the respondents had developed and sold condominiums to the Appellants in the USA subsequent to the sale defects were discovered in the condominiums. The appellants instituted suit against the respondents in 1992 in the USA.

Judgement was given in favour of the appellants in April 1994. Between December 1993 and April 1994 the Respondents created an International trust in the Cook Islands and transferred all their assets to it. By the time judgment was given the defendants had transferred all their assets to the Cook Islands trust.

In December 1994 the appellants issued proceedings in the High Court of the Cook Islands to recover the judgment.

A mareva injunction was sought and granted to the appellants to prevent the further disposition of the respondents assets. The respondents applied to set aside the injunction on the grounds that the cause of action upon which the appellants had founded their case had arisen six years before the creation of the trust and therefore the appellants action was statute barred. The order was set aside in March 1994 on the grounds there was not sufficient evidence to support the appellants claim that the disposition of the assets was made with the specific intent of defrauding them. The appellants appealed this decision.

On appeal the court of appeal reinstated the mareva injunction pending trial on the issue of whether or not the respondent's intent had been to defraud the appellants. It however left unresolved the question of when the cause of action arose, indicating that it was unsure as to when this occurred, since it did not have sufficient evidence to base its decision.

The trustee of the trust applied to the privy council to set aside the injunction. The Privy Council denied the application stating that the application to it in the circumstances was premature.

THE IMPACT OF THE ORANGE GROVE DECISION ON BARBADIAN INTERNATIONAL TRUSTS

It is unfortunate that the issue of running of time was never adjudicated upon in the Orange Grove Case in the initial stages, the case has subsequently been settled as such the issue will never be adjudicated upon by the Cook Islands courts. Additionally the section has been amended to now provide for the institution of different causes of action at different times. It is the writer's speculation that should a case like the Orange Grove on arise in Barbados the Barbadian courts will be faced with a similar decision to make, since the Barbadian section on creditor protection is worded similarly to the Cook Islands section.

This inherent weakness however does not however place limits on the use of the international trust as a viable mechanism for investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.