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BVI Finance: Sept 2012

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Trust in the BVI

   

Henry Mander, a Senior Associate of the trusts team at Harneys, discusses the BVI as a leading jurisdiction for trust structures.

Feature Article

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The BVI-Gateway to Emerging Markets

 

Industry News

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Financial Service deMystified

 

Value Added Insurance Services: Strengthening the BVI's Position

 

Trust in the BVI

 

Premier Announces BVI's New Registration Ports at Monaco Show

 

UK Government Targets Overseas Investors

 

The trust is a key common law concept, which has evolved over the centuries into the flexible vehicle which is now commonly used for a wide variety of reasons by high-net-worth families and individuals around the world. These reasons include succession planning, asset protection, confidentiality and philanthropy.

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Some features of a classic trust are considered by some as inherent restrictions, however, and, in recent years, there has been a demand for more sophisticated and user-friendly trust solutions. The leading offshore jurisdictions, such as the BVI, have sought to meet this demand through innovative modern trust structures via specific legislative amendments to classic trust principles.

The BVI is an overseas territory of the United Kingdom and the general principles of BVI trust law are derived from the principles of English common law and equity, which are supplemented by domestic statutory legislation. Such statutes are, in the main, based on English statutory law, but there are some key additional provisions which have been enacted to make the BVI an attractive jurisdiction for establishing trusts.

Demand for Control
The reasons for such additional legislative provisions mainly stem from a demand for the person establishing the trust, known as the settlor, to be able to retain an element of control once the trust has been constituted. A trust is not, itself, a separate legal entity. The trustee is the legal owner of the trust assets which he holds, not for himself, but for the benefit of beneficiaries or for the furtherance of a purpose. The trustee holds a fiduciary position and "has the power and duty in respect of which he is accountable to manage, employ or dispose of the assets in accordance with the terms of the trust and special duties imposed on him by law".

Legislative Updates

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The BVI - Updating the AML Regime

Professionals Practicing BVI Law to be Regulated

 

Previous Issues

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August 2012

July 2012

 

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Leap of Faith?
The establishment of a trust requires a settlor to transfer legal title to the assets to a third party trustee which is a leap of faith for individuals, especially those from civil law jurisdictions unfamiliar with the basic concept of a trust. Furthermore, the trustee's duties will be to act in the best interests of the beneficiaries and not in the best interests of the settlor. Consequently, the trustee is required to act prudently in relation to the trust assets. This may create a clash of investment approach between that of a conservative corporate trustee and that of a risk-taking settlor who may have built up his or her wealth over time through entrepreneurial flair.

Prudent Investor Problem
This Prudent Investor Problem was keenly felt in the territory because BVI trusts are commonly used to hold shares in a BVI company, which, itself, is a holding vehicle for a family business. A BVI trust may typically be used in such a scenario for succession planning reasons and thus it is of great discomfort to the settlor that the trustee may have a duty to alter the make-up of the trust assets (i.e. by seeking to reinvest away from the family business) because the trust was specifically established as a succession vehicle for that family business.

Retention of Control Options
The retention of control options for settlors in BVI trust structures can be broken down into three categories:

a) Reserved Power Trusts
The BVI was the first offshore jurisdiction to introduce legislation for Reserved Power trusts, which enables a settlor to reserve trust powers to himself or another, typically a protector, or to require that the trustee obtain the settlor's consent before exercising a trust power. For example, a settlor may reserve to himself (or to a protector) the power to add or exclude beneficiaries from the trust or require that the trustee obtain his consent (or that of the protector) before making a distribution to a beneficiary.

b) VISTA Trusts
The Virgin Islands Special Trusts Act 2003 ("VISTA") was specifically enacted to solve the Prudent Investor Problem in relation to BVI companies held in trust. The key conditions of a VISTA trust are that the trust must only hold shares in a BVI company (or companies), the sole trustee must be a BVI licenced trust corporation and the trustee cannot be a director of the underlying BVI company. If these conditions are satisfied and it is expressly provided in the trust instrument that VISTA will apply to the trust, the trustee is prohibited from interfering in the management of the BVI company (except in extreme circumstances known as intervention calls). There is a restriction on the trustee's ability to sell the BVI company shares, which must be retained indefinitely, thereby solving the Prudent Investor Problem. Except when acting or being required to act on intervention call, a trustee of a VISTA trust "shall have no fiduciary responsibility or duty of care" in respect of the BVI company shares or "the conduct of the affairs of" the BVI company.

A settlor can thereby transfer shares in a BVI company into a VISTA trust safe in the knowledge that the trustee will not have a duty to sell those shares or intervene in the running of the company.

c) Private Trust Companies
Unlicensed Private Trust Companies ("PTCs") have been permitted in the BVI since 2007, although conditions are attached to the activities of the PTC, such as a prohibition on soliciting business from the public. The PTC must either carry out "unremunerated trust business" or "related trust business" (where beneficiaries of a trust must be "connected to the settlor").

It is thus possible for high net worth individuals or families to establish their own corporate trustee in the BVI as trustee of one or more family trusts. The PTC will, potentially, be more responsive and efficient than an external trust corporation, but the office of trustee remains a fiduciary position and trustee duties must still be discharged to the requisite standard of care.

Careful consideration must be given to the make up of the board of directors of the PTC but, typically, the directors might be a combination of family members, trusted advisors (e.g. the family lawyer) and industry experts, if the underlying trust assets include an operating business.

Conclusion
The introduction of legislation in the BVI concerning Reserved Power trusts, VISTA trusts and PTCs has enabled settlors of BVI trusts to establish a structure where they are able to retain a satisfactory level of control over the administration of the trust and, more importantly, the management of the underlying trust assets. This inherent flexibility, appreciated especially by those unfamiliar with trusts, has caused the BVI to remain an attractive and popular jurisdiction for the establishment of trusts for high net worth families all over the globe.

 

 

1Section 2(3) Trustee Act 1961 (as amended by the Trustee (Amendment) Act 1993 and the Trustee (Amendment) Act 2003.
2Section 86 Trustee Act 3Section 15(1) Virgin Islands Special Trusts Act 2003

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