Bahrain: In Trusts We Trust

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Bahrain continues to make changes to its legislative and commercial frameworks as part of ongoing attempts to keep pace with international standards and leading practice, diversify the economy, strengthen the private sector and attract more foreign direct investment. Changes to Bahrain’s trust law are just one of these important developments.

As well as being a legal way to hold and protect assets for a specific purpose, trusts are legal bodies that can enter into contracts, establish bank accounts and own financial investments and legal entities. Independently and professionally managed, trusts are created when one party (the settlor) transfers assets (such as property, investments, cash, patents or copyrights) to another party (the trustee) to hold for the benefit of one or more parties (the beneficiaries), generally for the long-term. Trustees in Bahrain are regulated by the Central Bank of Bahrain, giving the process additional credibility.

For private individuals, trusts offer a confidential way of holding family wealth for the long-term. Previously, trusts were believed to cater only to ultra-high net worth individuals (UHNWIs). This is changing as fees drop and the features and advantages of trusts become better understood.

Family trusts can help protect selected assets against claims and creditors – for example, protecting a family home from the failure of a business venture. They can also be used to set aside funds for special reasons, such as grandchildren’s education, or to protect assets for future generations or for charitable purposes. They also help manage the risk of unwanted claims on a settlor’s assets when he or she dies. In certain jurisdictions, where inheritances are subject to tax, trusts can enable taxefficient asset transfers.

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For businesses, trusts are extensively used for debt restructuring, investments (real estate investment trusts (REITs) and investment funds) and employee benefits plans (ESOPs and savings schemes) because of their ability to ringfence assets and provide professional, independent oversight. Ringfencing in this region has traditionally been done using legal entities with nominee ownership. With the increasing emphasis on corporate governance and transparency, the risk of consolidation with legal owners and the growing tendency to litigate for mismanagement, new regulations based on leading practice are nudging organisations towards using trusts.

Following recent regulatory updates, listed institutions which issue shares to employees under an employees’ savings scheme or an ESOP must do so through a trust. Collective investment undertaking regulations have been updated to cover the establishment of REITs, with Bahrain’s first REIT already established and listed on the Bahrain Bourse, which is actively promoting the listing of other REITs. A further change impacts how Bahrain courts enforce orders passed by courts in other legal jurisdictions where trustees are registered and regulated in that other jurisdiction.

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Highlighting its determination to establish leading practice, Bahrain has introduced Category B trustees, who can act as co-trustees in conjunction with a Category A trustee. This means a separate party, other than the regulated trustee, can become involved with the trust’s activities and jointly discharge responsibilities. This can be useful where families want to involve a family member in the activities of a trust.

Keypoint recently established a trust where family members act as Category B trustees.

How then do you establish a trust in Bahrain? Summarising the process, the settlor identifies all main parties and engagement terms and conditions are agreed. A trust deed is drafted (in either Arabic or English) and reviewed by legal counsel before it is signed by the settlor and trustee and notarised. The deed is then submitted to the CBB, along with parties’ KYC documents before assets are transferred to the trust.

Trusts are not always the solution. They do, however, offer a tried, tested, regulated and confidential way of protecting important assets. As Bahrain strives to maintain its position as a leading financial centre, the growth of a trust ecosystem is an important indicator of its unique advantages.

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