The BVI – VISTA Trusts in Practice

CASE STUDY 1:  BVI VISTA Trusts at Work – Business Succession Planning

The operator of a highly successful construction business, which operates in Country A, has been advised to place his high value 99.9 per cent shareholding in the company in trust. This is to ensure that upon his death, the business will be passed smoothly to his heirs and that probate is not needed in Country B where the company is incorporated.

However, the effect of the ‘prudent man of business rule’ – a rule of English trust law designed to help preserve the value of trust investments – might mean that even if a professional trustee could be found, the trustee of the new trust might be obliged, as a matter of law, to intervene in the affairs of the construction company, which the operator has worked hard to build from scratch, even if he remains its sole director. This would remain the case even if another company is inserted between the construction company and the trustees. 

Furthermore, it is apparent that if an attractive offer is made, the trustees might have to sell the construction business to satisfy short term considerations or have to sell it regardless if they conclude that holding the entire underlying trust fund in a specialised business may not comply with their duty to diversify the trust’s investments. 

The operator’s advisers point out that trustees will be required to be involved in the day to day running of the company and may require the directors to enter into an agreement with them so that all decisions which could impact the value of the company’s shares will need the trustees’ approval. This is despite the trustees having no expertise in relation to the technicalities of construction in Country A and could therefore mean they have to seek and pay for expert advice before they can approve any major decisions. This is a significant concern for a businessman who knows delays in the decision making process can be disastrous in the construction industry and who is also concerned to hear that the trustees might be obliged to exercise their shareholder powers by replacing the director if they do not follow the adviser’s recommendations.

The operator is extremely reluctant to be exposed to the fees that the trustees and consultants would likely charge both due to the value of his business and the risks involved in holding property of such a nature in trust and for the additional time spent monitoring the day to day running of the business.

He begins contemplating alternative solutions.

Given the circumstances the operator faces, a VISTA trust would be the most appropriate solution. A BVI company could be placed above the construction company and the shares in the former could be placed in a VISTA trust. The operator of the construction company could also be the sole director of the BVI company and the trust instrument would contain office of director rules specifying who will succeed him as director. Limited grounds for intervention could be included in the trust instrument, meaning the trustees would be unable to interfere in the day to day affairs of either the BVI company or the Country B company unless there were exceptional circumstances. The operator could be satisfied that a BVI VISTA trust has appropriately negated the aspect of the ‘prudent man of business rule’ that effectively requires trustees to monitor and intervene in the affairs of underlying companies.

Case study provided by Chris McKenzie, Partner, Walkers

CASE STUDY 2: BVI VISTA trusts at work – Estate planning

As part of his estate planning strategy, a retired businessman has been advised to transfer his valuable investment portfolio to the trustees of a new trust.  In the past he has managed his portfolio personally and it has consisted of investments, which would not generally be regarded as being in compliance with the rules of trust law as laid down by the English courts.

The ex-businessman is concerned that if professional trustees are appointed, they would not be able to continue to employ the successful investment strategy he has adopted to date. Although he could be appointed as the trust’s investment manager, advisers have stated that due to concerns about “sham trusts” and breach of fiduciary duty, professional trustees are increasingly reluctant to allow this. This is especially true in cases where the settlor, although successful in managing his own portfolio, has no relevant qualifications, experience or insurance cover. Even if the former businessman was allowed to manage the trust’s investments, trustees will generally insist on having the ability to dismiss the investment adviser at short notice. He is also told that such an appointment could increase the trustees’ risk related fees and charges as a result of the time needed for constant monitoring.

Another adviser has suggested the trust could hold the investments through a company of which the retiree could be the sole director. However, the professional trustees who have been approached have all pointed out that as controlling shareholders they would still be required to exercise shareholder powers to ensure that the company’s investments are managed in a way which is compliant with the principles of English trust law and that in the absence of applying such a policy, they might have to remove him as director.

In recent times, the best solution to the ex-businessman’s situation has been to transfer the investments to a new BVI company with him retaining sole directorship of the investment portfolio. The shares in the BVI company can then be transferred to the trustee of a new VISTA trust. The terms of the trust would be such that the trustee shareholders would not be required or indeed empowered to monitor and intervene in the affairs of the company or to change its directors simply because the director is pursuing an investment strategy which does not comply with English trust law principles.

Case study provided by Chris McKenzie, Partner, Walkers