Lawrie Kearns and Lara Mardell, Ogier, consider the lasting impact of the BVI VISTA Trust as it celebrates 10 years since its arrival on and revolution of the private wealth structuring landscape.
"Wealth will not survive the third generation" according to an old Chinese proverb. Despite this apparent recognition of the problem, and despite the fact that proper succession planning can help the family wealth remain intact, advisors in Asia often encounter greater reluctance than elsewhere to setting up succession planning structures such as trusts.
There are numerous possible contributing factors for this. One reason may be that many clients in Asia are unfamiliar with the concept of trusts, as they hail from jurisdictions where there is no history of them. Another factor is that many potential trust settlors are reluctant to hand over control of their hard-earned assets to a third party. A further factor, related to this, is that many investors in Asia are entrepreneurs who have established their own family businesses. A traditional trust structure may therefore be inappropriate, due to the fact that if a family business is owned as part of the trust fund the trustee will need to be involved in running the company.
The offshore world has developed a variety of innovations which can be used to address these issues, a key one of which is the BVI VISTA trust.
Origins of VISTA
BVI VISTA trusts were introduced in March 2004 by the Virgin Islands Special Trusts Act, 2003. A BVI VISTA trust addresses what can be a key issue with a traditional trust structure, concerning the duty of care of the trustee and its duty to act prudently in relation to trust investments. Where trustees hold a controlling interest in underlying companies such trustee obligations often give rise to issues, particularly where the underlying entities are active trading companies.
The trustee, as sole or controlling shareholder of the holding company of the family business, will be required to monitor the operation of the company, and in some circumstances may need to intervene or even consider selling the business. A professional trustee may not have the degree of specialist knowledge and expertise necessary to take the commercial decisions needed as the controller of some types of business.
Moreover, the very nature of the trustee role often effectively prevents a trustee from having the same attitude to commercial risk and taking the type of difficult commercial decisions which entrepreneurs are able, prepared and required to take.
Even where the potential settlor does not own his own business, but simply owns an investment portfolio, we find in Asia that he or she usually wishes to maintain control of investment decisions in respect of this. The assets will frequently be owned by a BVI company (so common in Asia that they are referred to as "BVI's"), and the settlor will frequently not be happy with the trustee being involved in the running of the company.
Traditional trusts have addressed this issue by adopting the ‘anti-Bartlett’ clause, named after the case Bartlett v Barclays Bank Trust Company Ltd where a trustee was held to have failed in its duty, as controlling shareholder of a family company owned on behalf of the trust, to supervise a risky and ultimately disastrous business venture of the company. An anti-Bartlett clause attempts to absolve the trustee from the duty to become involved in the management of a trustee-owned company. However, the trustee still has power to obtain information about the company’s activities and to intervene if necessary.
The widely held view is that the trustee must consider exercising this power from time to time, and that if it fails to do so this could be held to be recklessness tantamount to dishonesty, liability for which cannot be excluded by a trust deed. Ultimately, whilst the existence of an anti-Bartlett clause may purport to exonerate a trustee from his traditional duties to monitor and intervene, the trustee will naturally look to limit his liability to the fullest extent. BVI VISTA trusts put this protection on a statutory footing.
In a BVI VISTA trust the legislation expressly provides that the trustee not only has no responsibility to become involved in the management of the family business or other underlying assets, but does not even have any power to do so. The trust is essentially a trust to retain, rather than the usual trust for sale. This statutory limitation on the trustee's ability to intervene in the decisions of directors is entirely appropriate. A trustee can seldom claim to have the requisite knowledge to conduct the affairs of trading entity in a foreign jurisdiction. Further, any delegation of this function will inevitably render the business unresponsive and prevent it from seizing opportunities the entrepreneurial settlor would otherwise seize upon.
The assets of a BVI VISTA trust are held by a BVI company and management of those underlying assets (including any family business) is effectively reserved to the board of directors of the BVI company (which can include the settlor, persons proposed by the settlor and/or members of the settlor’s family).
The Office of Director Rules (ODRs) contained in the trust deed may provide detailed provisions with respect to the appointment, removal and remuneration of the directors. Typically, the settlor will act as "Appointor" and will thereby have the power to determine the make- up of the company's' board. It is through these ODRs that a settlor obtains the comfort that it is he who shall be in control of the company rather than the trustee as would be the case in a traditional trust arrangement. Further, it should be noted that the trustee of the BVI VISTA trust is expressly prevented from acting as a director of the underlying BVI Company.
The clear, express and focused legislative framework of VISTA 2003 makes the BVI VISTA trust a unique structure for holding a family business. It is also an extremely useful way for a trust to hold other family assets, such as family heirlooms, which are not intended to be sold, or where the settlor wants to retain management powers over such assets for himself and his family.
In addition to the structuring of family wealth practitioners have increasingly seen the application of VISTA in a commercial context. VISTA has proved to be a popular tool when establishing structures involving unusual or new asset classes in both balance sheet and off-balance sheet transactions.
May 2013 saw the BVI enact the first substantive amendments to VISTA as the Territory sought to fine tune its financial services legislation. These amendments were designed to strengthen the appeal of the VISTA regime and ensure that it remained at the cutting edge of international planning.
Perhaps the most significant amendment to VISTA was the change in the rules governing trusteeship and the definition of "Designated Trustee". The original requirement that a trustee must be a BVI licenced service provider was considered restrictive and updated to also allow a BVI Private Trust Company (PTC) to act as trustee. In addition, co-trusteeship is now permitted (provided one trustee is a BVI trust licence holder or a PTC). This change made it possible for trust companies without a BVI licence to be involved in the establishment and administration of VISTA trusts. This relaxation of rules relating to trusteeship has proved extremely popular. Asian clients are now able to establish structures which provide for even greater retention of control albeit that such structuring requires the maintenance of good corporate governance. Further, non-BVI licensed service providers have now got an incentive to promote VISTA trusts to their clients.
In addition restrictions preventing transfers and appointments of assets from other trusts to VISTA trust were removed. This amendment has provided the platform to ensure existing structures may more readily take advantage of the VISTA regime without the need for complex restructuring. The only remaining restriction is that the transferor trust must be governed by BVI law and one of its trustees be a "Designated Trustee".
Section 15 of VISTA may be varied to allow for a settlor to impose fiduciary duties upon the trustee in respect of the assets of the company. This allows for modification of the trustee duty of care and leads to opportunities to establish trust instruments with bespoke trustee duties.
An amendment to the BVI Trustee Act has also seen an increase in the popularity of VISTA trusts. The extension of the perpetuity period from 100 years to a period not exceeding 360 years has also been met with approval from Asian clients wishing to leave a lasting legacy.
There can be little doubt that the introduction of VISTA trusts some 10 years ago has dramatically changed the private wealth structuring landscape for Asian clients. The ability to retain control has been critical in providing an opportunity for Asian clients to contemplate succession solutions to their personally held BVI companies. The amendments introduced in 2013 have further strengthened the VISTA proposition and enabled the BVI to leverage off the unparalleled success of the BVI business company.
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Lara Mardell Lara advises private clients, trustees, charities and other philanthropic organisations and their professional advisers on structuring with offshore trusts, foundations and related entities, including BVI Vista trusts, Cayman STAR trusts, reserved powers trusts, private trust companies, offshore companies, Jersey foundations and Guernsey foundations and wills.
Lawrie Kearns Lawrie specialises in all areas of international trust and estate planning with a particular emphasis on creating new and innovative trust solutions. Lawrie regularly advises leading international law firms, professional trust companies, private banks and wealthy private families on the creation and administration of BVI fiduciary structures and on all matters relating to BVI trust and succession law.
Ogier British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Jersey, London, Luxembourg, Shanghai and Tokyo.