British Virgin Islands

The Use of Family Investment Funds for Estate Planning in the BVI

By Zac Lucas, Partner, Ogier and Simon Schilder, Partner, Ogier (01/08/2012)

According to the latest Credit Suisse Global Wealth Report, issued in 2011, global wealth is expected to increase over the next four years from US$231 trillion in 2011 to US$345 trillion in 2016. Emerging economies, such as Brazil, Russia, India and China are expected to continue to catch up with developed economies, with China alone expected to add US$18 trillion to the stock of global wealth in the next four years.


In consequence, during the next four years, the number of millionaires in emerging economies is forecast to increase, in some cases dramatically; Brazil is predicted to see an increase of 155 per cent taking their total to 815,000 millionaires, whilst Russia is predicted to witness an 80 per cent increase taking their total to 171,000 millionaires, India 150 per cent increase taking their total to 510,000 millionaires and China 134 per cent increase taking their total to 2.3 million.


The use of companies incorporated in the British Virgin Islands (BVI) continues to be popular with high net worth individuals and families from emerging economies. As at 31st March 2012, 468,339 BVI companies were recorded as active on the BVI's register of companies, with 17,865 new incorporations recorded in the first quarter of 2012.


A current trend is that the use of BVI companies, limited partnerships and trust vehicles by high net worth individuals and families is becoming increasingly sophisticated, with BVI companies now more likely to form part of a family investment structure (Family Fund) when in the past its purpose may have been limited to that of a holding vehicle.


Estate and Succession Planning


Where a Family Fund forms part of a wider succession plan, a unit trust structure is typically adopted as the vehicle of choice, although a company or limited partnership structure could equally be utilised. A unit trust is generally preferred as it enables the family to create, by express reserved powers in the trust deed, joint corporate and family governance rules. The ability to create participatory corporate and family governance rules is particularly important where the family wishes to structure ownership, control and succession to an underlying BVI company, which might represent a family business.


Under such a structure, the trust would issue units representing the holder’s investment in and entitlement to the net value of the trust fund. Units may be issued in different classes with different entitlements and may be redeemable at the option of the unit holder (although see below for the regulatory implications of this) or the trustee. Units may be issued to individual family members, trustees of private family trusts or closely held family companies, as required. It is usual for the trust deed to contain extensive pre-emption rights and restrictions to prohibit transfer of units outside of the family.


A traditional private family trust would generally not be appropriate as the family would not want to confer on the trustee power or discretion to determine the extent of their interest in and entitlement to the trust fund as the trust will play an important part in regulating co-investment of family wealth across generations.


In addition, as mentioned above, the unit trust deed may contain a number of family and corporate governance rules. The trust deed may for instance establish investment, employment and redemption committees each with separate membership and voting rules and with powers to veto trustee decisions regarding investment of the trust fund, employment of family members and redemption of units. In this instance the unit trust would form part of a comprehensive business succession plan.


Regulatory controls


Where a BVI company acts as trustee of a unit trust it will be require a trust license under the Banks and Trust Companies Act, 1990. Where, however, the company qualifies as a private trust company (PTC) within the terms of the Financial Services (Exemptions) Regulations, 2007 a formal trust license will not be required.


Where a PTC acts as trustee, it is common for its shares to be held in a form of special purpose trust. Typically the purpose trust would be subject to the Virgin Islands Special Trusts Act, 2003 (VISTA).


VISTA enables a trust of BVI company shares to be created under which rules (Office of Director Rules) may be made to determine the directors from time to time of the company held in trust; in this case the PTC.


Office of Director Rules may provide for the automatic removal of directors in stated circumstances, such as in the event a director becomes US tax resident, and may limit appointment of new directors to family members only. Office of Director Rules may therefore form part of the overall family and corporate governance rules applicable to the unit trust structure.


The unit trust deed is exempt from the requirements of the Registration and Records Act (section 91(1) Trustee Act) and is therefore exempt from public registration.


As noted above, where units are redeemable at the option of the unit holder, this gives rise to additional regulatory considerations under the Securities and Investment Business Act, 2010 (SIBA).  Whether or not the Family Fund will be required to be licensed under SIBA will depend upon whether or not the units are issued with the right of redemption. Where units are redeemable on demand or within a period following demand by the unit holder, the unit trust will fall within the definition of a "fund" for the purposes of section 40(1) of SIBA and so will be required to be licensed as a fund by the BVI Financial Services Commission (FSC). Where however the units are not redeemable on demand or within a period following demand by the option holder, the Family Fund will fall outside the definition of a "fund" for the purposes of section 40(1) of SIBA and so will not need to be licensed as such by the FSC.


Where a Family Fund falls within the definition of a "fund" for the purposes of section 40(1) of SIBA, the most likely category of BVI fund which will be chosen will be a "private fund". To be eligible to be recognised as a private fund, the Family Fund must either have no more than 50 investors or make invitations to subscribe for fund interests on a private basis only (both criteria generally will be readily available for a Family Fund).


Whilst the implication of a Family Fund falling within the definition of a fund for the purposes of section 40(1) of SIBA brings with it a certain level of ongoing regulatory obligations and considerations, a number of exemptions are available to lessen the ongoing regulatory burden imposed upon the Family Fund, the most relevant and likely to be taken advantage of being the ability for closely held funds to apply under regulation 10(2) of the Mutual Funds Regulations, 2010 for an exemption from the requirement to appoint an auditor and prepare and file audited financial statements each year.


Importantly, whilst many Family Funds will be structured so as to fall outside the definition of a fund for the purposes of section 40(1) of SIBA by offering units which are not redeemable on demand or within a specified period of demand by unit holders, BVI domiciled service providers to the Family Fund may still be caught by SIBA on the basis that they are conducting "investment business" for the purposes of section 4(1) of SIBA. Critical to any analysis in this respect will be whether the underlying investments of the Family Fund represent "investments" for the purposes of Schedule 1 of SIBA and, if they do, whether the activities of the BVI domiciled service provider represents "included activities" for the purposes of Part A of Schedule 2 of SIBA. In these circumstances, the BVI domiciled service provider to the Family Fund will need to hold an investment business license under SIBA unless one of the "excluded activities" in Part B of Schedule 2 apply or the service provider is an "excluded person" for the purposes of Part C of Schedule 2.


Private wealth in emerging economies is projected to increase and grow over the next four years. BVI companies will likely continue to hold (whether directly or indirectly) a fair proportion of this new wealth.


Demographic pressures will result in an increasing number of high net worth families considering and creating Family Fund structures, particularly family unit trusts, as part of their business and estate succession plans.


Use of a BVI private trust company, held by a VISTA trust, combined with appropriate corporate and family governance rules contained in the family unit trust deed will enable high net worth families to create Family Funds that not only consolidate and structure investment of family wealth but also provide sophisticated participatory control mechanisms across generations. The BVI is therefore ideally placed to take advantage of the increased demand for fully structured Family Funds.