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> The Virgin Islands Special Trusts Bill

The Virgin Islands Special Trusts Bill
The Trustee (Amendment) Bill
The Property (Miscellaneous Provisions) Bill


On August 30, 2003, following several years of meticulous review of BVI and international trust legislation by members of the BVI branch of the Society of Trust and Estate Practitioners (STEP) and consultation assisted with internationally renowned trust practitioners and academics, new legislation relating to special trusts catering for succession to corporate businesses, various amendments to the Trustee Act and several amendments to the general laws of the BVI, received their first reading before the BVI legislative Committee. In keeping abreast with changes in international tax and estate planning, the three Bills have been formulated to meet the increasing demands of the BVI's international client base in seeking flexible financial products within a well regulated, internationally recognised framework.

The Virgin Islands Special Trusts Bill
Undoubtedly the most innovative (and which is likely to receive a great deal of international attention) of the three new Bills is the Virgin Islands Special Trusts Bill. Trusts which are created under the proposed Act, the terms of which are unique to the BVI, will be known as VISTA Trusts. The purpose of the Bill is to enable shareholders of BVI companies (the provisions of the Bill being limited in its application to BVI IBCs and domestic BVI companies) to establish trusts which disengage the trustee from management responsibilities in the underlying company, leaving these responsibilities to the directors, and enabling the shares in the company (and the business) to be retained as a trust asset for as long as the directors of the company think fit.

The enactment of this legislation will be beneficial to those individuals who would form a trust to hold shares in their offshore companies, but for the constraints of English trust law by way of the so-called "prudent man of business rule¡±. This is a rule which, while designed to help preserve and grow the value of the trust assets by assuming that the trust investments exist to produce the maximum return possible for the trust fund, may in practice compel the trustee to act in a manner incompatible with the wishes of the settlor and his family by imposing certain obligations on the trustee, including:
monitoring (and intervening where necessary) in the conduct of the directors of the underlying company thereby substantially increasing the administration costs of the trust, often resulting in unwelcome ¡°interference¡± by the trustee in the management of the underlying company;
exploiting the shareholding for a short term gain by accepting a financially attractive take over bid for the underlying company; or
looking to spread the financial risk through diversification by way of selling the shares or business assets entrusted to the trustee,
(all irrespective of the wishes of the settlor and the very reasons why the trust may have been formed in the first place).

While these obligations may seem attractive in the management and administration of a pure investment portfolio, in practice they may drastically conflict with the wishes of the typical owner of a family corporate business settling a trust, wholly or partly, for some purpose other than short or medium term financial gain, such as keeping the business within the family and other family and social concerns, career opportunities for descendants, employee and environmental concerns etc. And along the way raising significant problems for the trustee holding the shares in such a business.
There are already several possible solutions to these problems, some of which have never been tested before the courts and certainly none of which even can be considered watertight. Comprehensive trust legislation, specifically designed for holding shares in an underlying company, is by far the most effective solution and hence the legislative solution put forward by the proposed Bill, including:

authorising the entire removal of the trustee¡¯s monitoring and intervention obligations
permitting the settlor to give the trustee a role more suited to the trustee¡¯s abilities, namely a duty to intervene to resolve specific issues
allowing trust instruments to lay down rules for the appointment and removal of directors rather than leaving such appointment and removal to the trustee
giving both directors and beneficiaries the right to apply to court if the trustee fails to comply with the requirements of non-intervention or the requirements for director appointment and removal
prohibiting the sale of the shares without the directors¡¯ approval
as a regulatory safeguard, providing that a BVI licensed trust company (being subject to regulatory control under the BVI Banks and Trust Companies Act, 1990) shall act as trustee
Accordingly, the Bill is designed not only to assist with succession planning but is flexible enough to accommodate the wishes of any settlor who wants (for whatever reason) to establish a private trust to hold shares in a private company, but to allow the directors to run the company without undue interference from the trustees. We look forward to its enactment and assisting clients in taking full advantage of this innovative legislation.

The Trustee (Amendments) Bill
The Trustee (Amendment) Bill includes in it a substantial number of improvements to BVI trust law. These improvements include provisions relating to dealings between trustees and third parties (which have been drawn up with a view to increasing the attractiveness of trusts in the commercial context); some desirable provisions relating to charities; a robust new regime for ¡°purpose trusts¡±; and amendments relating to the BVI¡¯s ¡°conflict of laws¡± rules for trusts (including forced heirship provisions), which should provide the BVI with a thoroughly refined and comprehensive set of trust ¡°conflict¡± rules. The Bill also addresses several issues which were highlighted as leading to possible abuse by the KPMG Report such as ¡°flee clauses¡± which, although still permitted under the Bill, will not be allowed to operate following either a court order; the institution of criminal proceedings; or a regulatory investigation involving the settlor, trustee, beneficiary or trust property.

We believe these amendments were necessary considering the developments in the use of international trust structures over the past decade and are confident that as amended the BVI Trustee Act will be at the forefront on international trust legislation.

Property (Miscellaneous Provisions) Bill
The objective of the Property (Miscellaneous Provisions) Bill is to modernise BVI law in several areas. The most significant aspect of the Bill is a provision which abolishes the archaic requirement that deeds executed by individuals still need to be sealed, and which specifies, instead, that, as an alternative to satisfying the sealing requirement, a document will still qualify as a deed if it is drawn up so that it is expressed to be a deed and is witnessed.

( A legal update from Smith-Gughes, Raworth & McKenzie)


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