FOUNDATIONS IN THE BAHAMAS

For most people, the term ‘Foundation’ is often affiliated with charitable organizations that broadcast dramatical advertisements seeking to save the rainforest or feeding the poor on your local cable station. The common perception of a Foundation includes large organizations and billionaire families, while often distracted from other advantageous factors that can be utilized by the common man as a great asset management tool. Together with the beneficial legislative regime facilitated by the Bahamas jurisdiction, the Bahamian Foundation is perhaps one of the best asset managing devices in the world and remains a popular wealth management device for sophisticated investors.
remains a popular wealth management device for sophisticated investors.

WHAT IS A FOUNDATION?

Foundations shares its origins in civil law countries, where the Church was considered a “Divine Foundation” who held the legal capacity to manage assets with which it was endowed. These public Foundations were charitable organizations created by individuals for the benefit of society as a whole. Presently, Foundations play a huge role in the world of philanthropy and have developed into various types, often described as being of a private or public in nature, depending on its host jurisdiction. In the Bahamas, private Foundations are defined by the Foundations Act of 2004 (herein referred to as ‘the Act’), as an entity established by a registered Foundation Charter. According to the Act, Foundations are recognised as a legal entity, is resident and domiciled in The Bahamas and is able to sue and be sued in its own name (s. 3). Bahamian Foundations are required to hold assets that are effectively transferred in its possession (with full legal and beneficial title) as specified in its Charter of a value of no less that $10,000.00 and originating from any lawful business and may consist of present or future assets of any nature (s.3).

Foundations in the Bahamas are established by a Founder who is defined as a person who, by transfer of title subscribes his name to the charter establishing a Foundation acting either for himself or on behalf of another and who endows that foundation with its initial assets. A ‘person’ under the Act refers to either a legal or natural person, thus allowing corporations, partnerships, and other legal entities the ability to enjoy the benefits that a Bahamian Foundation has to offer. Foundations can also be established by a duly executed will of a deceased person, to which the testator of the estate would be the Founder and whose estate by transfer of title endows that foundation with its initial assets. It follows that in circumstances concerning the drafting of a last will and testament, a testator may instruct an executor of his estate to form a Foundation, and to allocate a portion of his property to the foundation as its founding assets to be distributed to beneficiaries of his choice. In forming the Foundation the Act makes it mandatory for the name of the Foundation to include the term ‘foundation’ in its official title “i.e. The Clark J. Kent Foundation”.

The Foundation as a Corporate Hybrid

When it comes to asset preservation, estate planning, and day -to- day asset management, the most preferred instrument used by practitioners in common law jurisdictions would be the traditional trust, which remains a dependable framework in the wealth management sector. Unfortunately trust structures lack the level of versatility often desired by wealth managers and clients alike, while facing practical challenges by clients who find it difficult to understand the legal parameters of a trust, or in circumstances where the client’s home jurisdiction does not recognize trust, as in most EU member states and other nations exercising “civil law”.

To address the shortcomings of traditional wealth management structures, Bahamian legislation has tailored its own version of a private Foundation by incorporating factors found in trust and corporate structures advantageous to asset preservation and management while retaining the traditional functions of a Foundation, resulting in the creation of a true ‘corporate hybrid’ containing the following benefits:

Trust Structure Advantages

1. May have vested or discretionary beneficiaries;
2. Benefit from Bahamas asset protection legislation;
3. May be established by will;
4. May be used to avoid forced heirship in certain jurisdictions;
5. Does not form part of a person’s estate;
6. Not automatically subject to probate proceedings.
   Corporate Structure Advantages
7. Benefits from limited liability and may have unlimited duration;
8. Not subjected to Perpetuities Legislation;
9. Recognized as a legal entity;
10. Has a Registered Office and registered wit the Registrar of Companies;
11. Allows for riskier types of assets to be managed;
12. Does not require a change in the legal ownership of its assets as a result of change in governing body.
    Other advantages include:
13. No statutory requirement for an external audit unless the foundation’s charter so provides;
14. In addition to a Foundation Council, the Bahamian Foundation may have some other governing body or supervisory person, such as a protector;
15. A nominee may serve as the founder;
16. The Founder may assign his reserved powers;
17. No need for Council members to be located in The Bahamas.
18. Ideal for both cross-border transactions and international estate and inheritance planning, due to the lack of direct taxes in The Bahamas.
    In addition, all Foundation Officers, council members and other supervisory personnel benefit from statutory indemnification from all liabilities, losses and expenses incurred by a foundation, provided they acted honestly and in good faith. A Foundation established in another country may redomicile in The Bahamas and a Bahamian Foundation may redomicile in another country if legislation permits.

WHAT DOES A FOUNDATION DO?

In the Bahamas, there is no need for the purpose or objective of a Foundation to be charitable in nature, making it an ideal corporate vehicle for the holding of private assets endowed on the Foundation for the benefit of the individual or classes of persons(s.4(3)). The Foundations Act requires that the main purpose or object of a foundation to include activities that are not unlawful, immoral, or contrary to any public policy in the Bahamas (s.4(4)), or carrying on either in or from within the Bahamas any activity with respect of which a license or authorization under Bahamian law is required, and must include the management of its assets(s.4(2)).

As its definition suggests, Foundations are formed by the registration of a foundation charter on the instructions of a ‘Founder’ who would indicate his appointed officers for the Foundation and its beneficiary(ies), together with the transfer an asset(s) valued B$10,000.00 or more to the Foundation by way of endowment. Upon transfer of the asset is complete, it ceases to belong to the Founder and do not become the property of any beneficiary until they are distributed. The Foundation manages the assets, investing them or otherwise, in accordance with the objects or purposes specified in the Charter by the Founder (s. 3).

USE OF FOUNDATIONS

As a hybrid between a trust and a company, a Foundation creates unique structuring opportunities. With its ability to be use as a private, commercial and charitable corporate structure, Foundations open the door for creative planning strategies. Here are a few examples:

To Retain Vested Interest in Family Companies
A Foundation is ideal for family business owners who wish to retain ownership of shares of his/ her company for the benefit of family members employed by the company. By using a Private Foundation the Founder would avoid potential complications which would have taken place if an ordinary trust was used.
Ownership of a Private Trust Company
Through the establishment of a Private Foundation, ownership of PTC shares by the Foundation is possible. Particularly in the case of family held assets, The Founder, members of his family and/or his advisors may be elected as directors of XPTC and assume responsibility for the management of XPTC.
In addition the directors of the PTC may take a more aggressive investment approach than an institutional trustee and would be prepared to undertake and possibly save on trust administration expenses. The Founder does not, however, own PTC, the Foundation does.
For Subordinated Debt
A Private Foundation may provide confidence regarding the ranking of priority amongst creditors involved in a loan transaction or on the issue of debt securities in insolvency. The charter of the Foundation could clearly provide that the rights of one creditor will be subordinated to those of another existing creditor.
For Philanthropic Purposes
For persons/ corporate entities desiring to support a philanthropic purpose which may not be exclusively charitable, a Private Foundation may be a suitable choice. A Founder may wish to endow a Foundation whose purpose is to promote efforts to contribute financially to the cure of a medical disease or other charitable humanitarian benefits.
To Separate Voting and Economic Benefits
In case of a private foundation, a Founder may endow the Foundation with non-voting shares of a company for the benefit of his/ her family while personally retaining the company’s voting shares. In this case, the Foundation will receive the economic benefits from the non-voting shares for the family of a Founder while the voting shares continue to be held by the Founder in his individual capacity.
For an Employee Share Option Scheme
Foundations can be useful in the context of employee share option schemes. It can be a useful vehicle for repurchasing shares sold by shareholder employees and making them available to other employees interested in purchasing those shares. This is useful for private companies, in which the sales of shareholdings may be very difficult or legally impossible to arrange. There may also be tax advantages for private companies and the employees in certain jurisdictions.
To Hold the Benefit of Warranties and/or Collateral
A private foundation would hold the benefit of warranties for a wider and/or changing class of investors. In cases where a company wishes to borrow funds from a group of lenders, and it is anticipated that the members of the consortium will change periodically, a foundation can be established in order to proportion the size of the loan for all lenders. As lenders change, they are excluded or added as beneficiaries of the Foundation.
For Wealth Management and Family office Structures
Private Foundations can be used as wealth management structures for the purpose of administrating assets that are transferred by a Founder for the welfare of a beneficiary. Revenues generated from the assets held by the Private Foundation may be administered while subject to lower taxes and other jurisdictional advantages offered by The Bahamas.

**FOUNDATION GOVERNANCE **

As with a trust or company, the Bahamian Foundation has a slate of key positions that can, or indeed must be filled.

The main players are:

The Founder(s)

As mentioned earlier, the Founder plays an important part in the establishment of a Foundation as he is responsible for the transfer of his assets to the legal ownership of the foundation by way of endowment or will. Prior to Registration, the Founder(s) must appoint at least one person (natural or legal) to be an officer of the Foundation. In establishing the Foundation the Founder may reserve powers as provided by the Foundation Charter, and he is also able to be a part of the foundation council, and as a Foundation nominee. The Founder is also able to determine the length of time in which the Foundation will exist.

The Foundation Council

The existence of a Foundation Council will depend on whether the Foundation Charter provides for one to be established. It may consist of two or more natural persons, a legal person and one or more natural persons, or a legal person by itself. The Foundation Officers are required to follow the instructions of the Council. The Foundation Council must ensure that the Foundation complies with the provisions of the Foundation Charter, the Foundation articles and the all Bahamian Foundation legislation. It also has the power to access the books, records and accounts of the Foundation and has further right to:

1. Be informed of all meetings of the Officers;
2. Attend and be heard but not vote at meetings of the Officers;
3. Be included in the circulation of the foundation’s business documents when they are circulated to the Officers;
4. Be informed of any delegation of powers to Officers
5. Appoint financial auditor(s) for the foundation accounting records.
   The Foundation Officers

The Foundation Officers, in the absence of the Council, are the governing body of the Foundation, of which their duties are primarily administrative rather than fiduciary in nature. An Officer of the Foundation may be a legal person. The Act lists those persons who cannot be Officers, such as an undischarged bankrupt. Furthermore Foundation Officers and Auditors of the foundation (and related parties) are not eligible to be appointed as members of the Foundation Council.

Officers are required to exercise reasonable care and skill in the conduct of the affairs of the foundation, including exercising due care and skill in the management and investment of the foundation assets, and must act in accordance with the Foundation Charter and Articles. No officer of the foundation shall be personally responsible for any liability of the Foundation unless the liability is incurred as a result of his own gross negligence, willful default or misconduct, fraud or dishonesty. A court also has discretion to relieve an officer from liability.

The Secretary

A Secretary must be appointed in respect of the Foundation and must be either a licensee under the Financial and Corporate Service Providers Act or a trust company under the Banks and Trust Companies Regulation Act. If a person ceases to be Secretary, any liability incurred by him while acting as Secretary is still enforceable against him by the foundation. Like a corporate secretary of a company the foundation secretary has a traditionally known variety of functions pertaining to the governance of the foundation which includes legislation compliance, ensuring that all fees are paid up to date, and communicating with the Foundation Council/ Protector/ Protectorate Committee on meetings held by the Foundation Officers.

The Protector/ Protectorate Committee

Should its existence be provided for by the foundation charter The Protector/ Protectorate Committee can play an active or passive role in the governance of the foundation, such as the protector’s ability to appoint and remove members of the Foundation Council. Governance powers as delegated by the Foundation Charter may provide for the necessity of the Protector/ Protectorate Committee’s consent for decisions made by the Foundation Council on behalf of the foundation itself.

The Beneficiary

Generally speaking a beneficiary is a natural person or legal entity which receives benefits such as assets, payments, etc. from a benefactor, in this case the foundation. A beneficiary who has an interest in some or all of the Foundation’s assets must be notified in writing by the Foundation Officer of his interest and is entitled to receive information on request from the Foundation regarding the fulfillment of the objects of the Foundation and to inspect and copy the constitutional documents of the Foundation. Audit report and any minutes of any meetings of the officers of the Foundation Council or any other supervisory body are entitled to be inspected by the beneficiary.

Akin to beneficiaries holding vested interest in a trust, should the Foundation not supply the requested information or allow inspection of the documents by the beneficiary, the beneficiary may apply to the court for an order of compliance.

Reference By : http://www.lawyerlex.com/foundations-in-the-bahamas/