How to retain settlor control in BVI and Cayman trust structure

BVI and Cayman Islands are British overseas territories. Both jurisdictions are ruled under the English common Law and equity but with some interesting additional provisions so as to make them appealing jurisdictions for establishing trusts.

The BVI and Cayman Island companies and trusts have a wide use in international investing and they are preferable jurisdictions of high net worth individuals.

Demand for Control

The settler is able to retain some control after the trust has been formed. The trustee is considered to be the legal owner of the assets protected by the trust and he acts on behalf of the beneficiaries.

Leap of Faith?

Many individuals who are set as Trustees by the Settlor consider this asset administration as a leap of faith. They need to act on behalf of the Settlor but for the benefit and best interest of the beneficiaries. This many times creates the “Prudent Investor Problem” as the trustee is called to take the risk of the decision on behalf of the Settlor but for the best interest of the beneficiaries.

Prudent Investor Problem

While the usual case of BVI and Cayman Island trusts has been to hold shares in a BVI or Cayman Island company whereas the Company is a shareholder of a family business, the Prudent Investor Problem arises when the trustee wishes to invest away from the family business and therefore alter the make up of the trust assets.

Retention of Control Options

For all the above reasons, the retention of control options for settlors in BVI and Cayman trust structures can be broken down into three categories:

a) Reserved Power Trusts

This type of trust enables the Settlor to hold some powers for himself or another (a protector) or to have the ability to approve the trustees power before execution e.g. distribution to a beneficiary. Furthermore, the Cayman Islands have moved a step forward as to as to create a statutory presumption that the settlor intended to create a trust with immediate effect and this presumption will not be rebutted by such reservation of powers to the settler.

b) VISTA Trusts & STAR Trusts

In an effort to solve the above Prudent Investor Problem The Virgin Islands Special Trusts Act 2003 (“VISTA”) was enacted. For this reason, under this category of Vista Trust, the Trust must hold shares in BVI company or companies in which the sole trustee is a  BVI  licensed trust corporation and the trustee cannot be a director of the underlying BVI company.

Therefore, if the above are satisfied, then the trustee is prohibited to interfere in the management of the BVI Company, except in extreme circumstances known as intervention calls.

The Trustee cannot sell the BVI company shares except in the event he needs to act or being required to act on an 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.

STAR trusts, on the other hand, were enacted via the Special Trusts – Alternative Regime legislation in Cayman. They are arguably the most flexible and advanced trust product available for three reasons:

i) They may exist indefinitely;

ii) The trust assets can be held for both specific purposes and human beneficiaries;

iii) The concept of beneficial entitlement and the enforcement of a trust are split because all rights of enforcement are vested in the office of the enforcer such that the beneficiaries have no automatic right to information about the trust, nor to bring proceedings against the trustee.

Settlors of STAR trusts are therefore able to stipulate that holding the shares in the underlying BVI/Cayman company or family business or following a business plan to develop that business is the purpose of the trust. This means that the trustee cannot be criticised for continuing to own the shares and not reinvesting into more conservative investments.

c) Private Trust Companies

Since 2007 in the BVI and 2008 in Cayman, it has been permitted to establish unlicenced Private Trust Companies (“PTCs”). Conditions are attached to the activities of PTCs, such as a prohibition on soliciting business or contributions from the public and restrictions on the type of trust business which they can carry out.

Therefore, high net worth individuals or families establish their own corporate trustee in the BVI or Cayman to be 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.

One also needs to consider how the ownership of the PTC is to be structured. PTCs can be limited by guarantee, but it is more common for them to be limited by shares. Practitioners will advise against shares in PTCs being owned by individuals outright so as to avoid the usual succession problems which come with outright ownership, such as the requirement of obtaining a Grant of Probate in Cayman or BVI after the death of the owner of the PTC shares. It is therefore common for the shares in PTCs to be owned by non-charitable purpose trusts which take advantage of the VISTA (if the PTC is a BVI PTC) or STAR regimes.

Conclusion

The introduction of legislation in the BVI and Cayman concerning Reserved Power trusts, VISTA and STAR trusts and PTCs has enabled settlors of trusts in these jurisdictions 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, which is appreciated especially by those unfamiliar with trusts or where the trust is used as a succession vehicle for an operating family business, as is commonly the case in Asia, has caused the BVI and Cayman to remain attractive and popular jurisdictions for the establishment of trusts for high net worth families all over the globe.

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