Bahrain: A Trust-Friendly Hub
Hussain Mahdi of EDB Bahrain, along with Gaby Samir El Hakim and Maha Alkhabbaz of the National Bank of Bahrain offer a legal overview of Bahrain’s evolving trusts framework.
Trusts are powerful tools for managing wealth and protecting assets for future generations, either while the settlor is alive or after the settlor has passed away.
In this article, we explore the current legal framework governing trusts in the Kingdom of Bahrain, with a focus on the fiduciary duties arising under this framework and the key type of trusts recognised.
We will also examine potential reform to such legal framework to increase alignment with international best practices. Through such reforms, Bahrain may better establish itself as a trusted regional hub for estate planning and long-term asset preservation.
AN OVERVIEW OF BAHRAIN’S EXISTING TRUST LAW FRAMEWORK
Trusts in Bahrain are governed by the Legislative Decree No. 23 of 2016 in Respect of Trusts (the “Trusts Law”), which defines a trust as a legal relationship where assets are held by a trustee for the benefit of beneficiaries or for a specified purpose. Trusts must be registered with the Register of Trusts maintained by the Central Bank of Bahrain (the “CBB”) within 30 days of creation, where such trust is managed by at least one trustee who is licensed by the CBB. It is highlighted that the Register of Trusts is accessible only by court order or authorised individuals.
TYPES OF TRUSTS COMMON IN BAHRAIN
Under the Trusts Law, several types of trusts are commonly recognised and regulated, including the following:
- Family trusts, used for succession planning and asset preservation and are particularly common in the context of family businesses;
- Charitable trusts, created to promote philanthropic purposes; and
- Institutional trusts, often used by corporate entities for asset management purposes and to create and maintain share incentive schemes.
DUTIES, POWERS AND RESPONSIBILITIES
The Trusts Law outlines the duties, powers, and responsibilities of trustees and includes provisions to regulate the rights of beneficiaries:
Trustee duties
Trustees are bound by fiduciary duties to act in good faith and in the best interests of the beneficiaries. The key duty is to preserve (and in certain circumstances, enhance) the trust property while exercising care and diligence as a prudent person would, avoiding personal gain and conflicts of interest, maintaining accurate records, ensuring confidentiality, and complying with registration requirements.
Confidentiality and personal data protection obligation are also key requirements to create a trust-friendly jurisdiction which protects the interests of the beneficiaries. Trustees are subject to the Legislative Decree No. 4 of 2001 with Respect to the Prevention and Prohibition of Money Laundering and the anti-money laundering requirements under the CBB rulebook, which includes amongst other obligations, carrying out customer due diligence. Trustees are also subject to stringent preservation obligations under the Trusts Law, where they may be held liable for any loss or depreciation of the trust property due to negligence or breach of obligations. Trustees may also be held liable for unlawful profits gained from the trust and any failure to act upon knowledge of a co-trustee’s negligence or breach.
Beneficiary rights
Beneficiaries have the right to be identified under the trust instrument and receive distributions in accordance with the trust instrument, Additionally, beneficiaries may request information and documents relating to the trust and challenge the trustee’s actions in the event of a breach of duty.
Regulation and Supervision
The CBB licenses and supervises corporate trustees and sets out the requirements and fees applicable to such licenses. In the event of misconduct or breach, the CBB holds the authority to take enforcement action to ensure compliance with the obligations of the Trusts Law.
As we navigate the legislative framework governing trusts in Bahrain, our colleague Bassam AlTattan, head of private banking at the National Bank of Bahrain, brings valuable perspective from a private banking perspective “Bahrain’s Trusts Law provides a foundational structure for fiduciary oversight and value preservation. However, possible reforms to the law may provide flexibility and enhance enforceability for more complex estate planning structures.”
POSSIBLE REFORMS TO BAHRAIN’S TRUSTS LAW
Over the past decade, many jurisdictions have undertaken significant reforms to modernise their trust systems as part of a global wave of legislative updates.
Bahrain may consider taking steps to reform its trust framework to align with best practices in common law jurisdictions. As a civil law jurisdiction, Bahrain’s legal foundations differ from those of common law countries such as the UK, the US, Singapore, and the Cayman Islands, where trust structures, beneficial ownership, and fiduciary duties are rooted in common law. To address this, Bahrain may consider integrating key common law principles into its Trusts Law to boost its global trust law standing.
Key Proposed Reforms
Resolve Sharia Concerns
Reforms may be carried out to clarify the application of the Trusts Law in light of Sharia inheritance laws. To enhance certainty under such reforms, the principles of Sharia would not apply to a Bahraini or foreign trust unless the trust instrument explicitly states that Sharia governs the trust or any aspect of it.
Additionally, such reforms may define the legal nature of trusts more clearly, highlighting that it is held separately from the trustee’s personal assets. Under such legal position, the trust will be protected from claims by creditors, heirs, or other third parties, and will not form part of the estate of the trustee, settlor, or beneficiaries upon death.
Innovative Trust Options
Reforms may introduce flexible trust options, including layered trusts, which is ideal for ultra-high-net-worth families with complex objectives. These structures may consist of sub-trusts, each serving a distinct purpose, asset class, or beneficiary group. Each sub-trust operates independently, ensuring legal protection, privacy, and regulatory compliance. Layered trusts may also include intermediary entities like companies or investment funds.
Additionally, the reforms may allow the creation of Private Trust Companies, established solely to act as trustees for private or family trusts, without offering services to third parties outside the designated beneficiaries.
Assets Protection
Additional reforms may adopt statutory barriers against the enforcement of foreign judgments seeking to challenge the validity of a trust or target trust assets.
such barriers would block foreign judgments and prevent unwanted interference or orders related to divorce, succession rights, or insolvency from being enforced against their trusts. Any creditor wishing to pursue a claim would be required to initiate a new lawsuit within Bahrain.
Embracing Perpetuity for Generations
Succession planning remains one of the most significant challenges for family businesses. Recognising this, possible reforms may eliminate the existing 100-year limit on trusts, allowing them to exist indefinitely when explicitly stated in the trust instrument. This positions Bahrain to adopt a more flexible and enduring legal framework, aligning with globally recognised, time-tested structures. By removing the rule against perpetuities, both charitable and non-charitable trusts can now be established to last indefinitely,enabling families to protect assets and support multiple generations well into the future.
Dispute Resolution by Arbitration
To promote alternative dispute resolution and preserve relationships among parties, possible reforms may allow trust deeds to include binding arbitration clauses for resolving disputes or administrative matters. When such a clause is explicitly stated, it becomes binding on all parties involved — including the settlor, trustee, beneficiaries, protector, and enforcer. Arbitration offers a more private and efficient forum for resolving trust-related issues, and the arbitral tribunal would be vested with all the powers typically held by the court under the law. This includes the authority to seek guidance through a Beddoe application (being an application made by a trustee on behalf of a trust while ensuring that their costs can be settled from the trust) on matters related to the administration, execution, or distribution of the trust’s assets.
CONCLUSION
Bahrain’s Trusts Law provides a solid foundation for asset protection and fiduciary governance. Proposed reforms discussed in this article aim to enhance legal efficiency, promote Bahrain as a trust-friendly jurisdiction, and establish it as a leading center for trust formation and administration across the GCC and wider Middle East.
Text by:
- Hussain Mahdi, executive director (legal), EDB
- Gaby Samir El Hakim, group chief legal officer & corporate secretary, National Bank of Bahrain B.S.C.
- Maha Alkhabbaz, legal counsel, National Bank of Bahrain B.S.C.
