These factors, coupled with the comparatively low cost of establishing and maintaining BVI trust structures have made the BVI a popular choice for settlors seeking to manage their wealth through an offshore trust structure. This article will outline some of the principal features, from the wealth management point of view, of a BVI trust structure and the various forms it can take. It will also look at some of the principal issues as regards succession to assets and how use of a trust structure may help to circumvent them.
What is a BVI Trust?
A BVI trust is not an entity but involves a transfer of ownership in an asset by a settlor to an individual or entity called a trustee to be held by the trustee for the benefit of the beneficiaries of which the settlor (and, even, the trustee) may be one. The trust property, however, is owned by the trustee only nominally since although title to the assets vests in the trustee, beneficial enjoyment of them vests in the beneficiaries. For insolvency purposes therefore, the trust assets are not treated as part of the trustee's estate and are not available to the trustee's creditors. The trustee is thus accountable to the beneficiaries for his stewardship of the trust property or fund and, ordinarily, he will have the duty to invest it prudently for their benefit.
A BVI trust for beneficiaries may now last for up to 360 years and may confer either fixed interests on named beneficiaries or allow the trustee to confer discretionary benefit amongst a defined class of beneficiaries (typically the settlor's descendants) throughout the trust period as may seem appropriate from time to time. A settlor may, in the case of a discretionary trust, issue one or more letters of wishes which can guide (but not bind) the trustee in the exercise of any discretions or powers conferred on the trustee.
Importantly, however, a settlor needs not part with all control over the trust property when establishing a BVI trust since he or she may reserve certain powers (including the power to revoke the structure or to direct investment of the fund) or, through use of the VISTA trust regime, unique to the BVI, retain management and control of any BVI business company whose shares are placed into trust. A settlor may alternatively incorporate a private trust company ("PTC") to be trustee of the trust. By applying the VISTA trust regime to the shares in the PTC, the settlor can ensure that appointments to the board of the PTC and, therefore, control of all decision-making in relation to the trust are made on the settlor's direction in accordance with "Office of Director Rules" ("ODRs") allowed for by the VISTA legislation.
Succession Issues in Relation to BVI Situated Assets Faced by Foreign Domiciliaries.
Where title to BVI situated assets (such as shares in a BVI business company) is vested in an individual at death, it will pass according to applicable succession law, which is normally either the law of the domicile at death or that of the nationality of the deceased. In order to circumvent any mandatory provisions of such succession law, and sometimes in order to minimize the incidence of tax on death, an offshore entity will be incorporated to hold title to the property. Many BVI business companies have been incorporated for these or similar reasons. The succession issue will persist, however, if the shares in that entity are placed in the name of an individual which, no matter how many corporate layers are interposed, will ultimately have to be the case. On the death of that individual, the questions will arise: who is entitled to the shares and how can it be transferred to them?
A number of difficulties can arise in answering these simple questions depending on the fact pattern involved. All of them, however, can be avoided or resolved through use of a BVI trust structure established during the life of the settlor. It may be helpful to analyse the ways in which a trust structure may do so by looking at a series of similar but different fact patterns as hypothetical case studies:
Case Study 1:
A, the sole shareholder in a BVI business company, X Co, is a national of the People's Republic of China ("PRC") and dies domiciled there. X Co is the top holding company of a group of PRC subsidiaries which operate manufacturing businesses in the PRC. Under BVI private international law rules, PRC succession law will govern entitlement to the shares in X Co on A's death. In order for the shares to be transferred to the persons entitled to them under PRC law, an appropriate alteration will have to be made to the membership register. The BVI registered agent of X Co will, however, require to see either a transfer of the shares executed by A before death or a grant of representation from the BVI court to one or more of the persons entitled to the shares under PRC law before any such alteration can be made. Assuming that A had not executed a transfer before death, the only option would be, therefore, an application to the BVI court for a grant of representation. This, however, can involve a delay of some months (with the possibility of interruption to the chain of command in the X Co group meanwhile), legal costs and attendant publicity since the application must be advertised and the court order will be a publicly searchable document.
Case Study 2:
As in case study 1 but A transfers his shares in X Co to Trust Co, a BVI licensed trustee, to be held on a discretionary trust for A's descendants over a specified trust period not exceeding 360 years. A writes a letter of wishes explaining to Trust Co how he would like the trust administered but, as advised by his lawyers, expressly states in his letter of wishes that it is not binding. In this scenario, no question of needing to transfer title to the shares on A's death arises since title to them is vested in a BVI entity and no provision of PRC law or judgment of a PRC court in favour of an heir under PRC law may be given effect by the BVI court if the consequence of doing so would be to undo the transfer into trust. Furthermore, the arrangement is a purely private arrangement needing neither BVI governmental approval nor any sort of registration or publicity. It satisfies A's legitimate desire for privacy and, through the equitable obligations of confidence imposed on Trust Co, confidentiality. However, A has had to part with control over the asset which constitutes his life's work and is reliant on the trustee given overriding weight to his letter of wishes in the face of persistent demands and threats of legal action by the beneficiaries to whom Trust Co is accountable. That is something he cannot bank on.
Case Study 3:
As in case study 2 but, instead of transferring his shares in X Co to Trust Co, A incorporates his own PTC in order to undertake trusteeship of the discretionary trust. In order to be sure that he controls the board of the PTC and the decision-making in relation to the trust so long as he lives, he takes the shares in the PTC in his own name and appoints himself to the board of the PTC. This solves a number of the issues which worried A in case study 2 but raises the succession issue again: what happens to the shares on A's death and who will then acquire control of the board and the right to make decisions at board level in respect, and for the duration, of the trust?
Case Study 4:
As in case study 3 but A is advised to place the shares of the PTC in a purpose trust of which Trust Co is appointed trustee and to which VISTA is applied, allowing A to specify ODRs saying that during his lifetime he or anyone he nominates in writing shall be appointed to the board or removed from it and that, after his death, B and C (or others identified specifically or generally) shall be appointed and so on. This arrangement removes entirely any question of succession to the shares in the PTC and, by placing them into a trust in which the trustee has no powers or duties other than to hold the shares, in effect, and to make appointments to the board of the PTC in accordance with A's directions from time to time, ensures that A will nonetheless remain in full control of the administration of the family trust of which the PTC is trustee.
Conclusion.
As can be seen from these case studies, the BVI trust product has been well designed to afford foreign domiciliaries a reliable way of structuring and managing their wealth offshore and to do so in a way which offers the benefits of alienating title to an offshore entity on trust while allowing settlors to retain a high degree of control over the assets placed into that trust and maximum flexibility to determine what shall happen to those assets after their demise.
