The use of British Virgin Islands Trusts in the Middle East
We have seen that over the last few years that there has been an increase in the use of British Virgin Islands (BVI) trust structures in the Middle East and this relates to the diversification of family planning, the continued popularity of the BVI as a reputable jurisdiction, as well as major shifts in the global economy. There has been a dramatic alteration in the way High Net Worth (HNW) families in the Middle East generally perceive succession planning and the importance and value such planning can have in preserving wealth for future generations.
Bespoke succession solutions
The BVI has a wide variety of succession planning options that a HNW family will consider attractive, especially where an operating business is held. Where an operating family business exists, there most usually is a strong desire to keep the business within the family and for family members to be able to retain elements of control over its management in the future.
BVI private trust company structures
There has been an increase in the popularity of BVI private trust company (PTCs) structures in the Middle East. The BVI has built a reputation as a leading jurisdiction in which to incorporate PTCs. Setting up a PTC allows the settlors or their trusted advisors or family members to exercise a degree of control over the decisions made by the PTC. By sitting on the board of directors of the PTC, a HNW family can make decisions as and when required and these decisions are expeditiously carried out without having to wait on an independent trustee to deliberate on matters.
PTC structures also allow a HNW family to set up a number of different trusts under the PTC thereby enabling assets to be ring-fenced or individual trusts to be set up for different family members.
PTCs have become a popular option in the Middle East for families looking for pre-initial public offering (IPO) structuring as well as integration with family office solutions, complimenting both onshore and offshore structures.
BVI reserved powers trust
The most common form of discretionary trust structures used by HNW families, (subject to further local advice in the countries where the family members are resident and domiciled and where the assets are considered situs) is the reserved powers trust. The popularity of reserved powers trusts stems from its ability to allow a settlor to reserve certain powers for him or herself (or to confer such powers on others) under the terms of a trust instrument. The BVI has comprehensive statutory legislation confirming that the reservation of such powers will not invalidate the trust. Some of these powers include: the power to add and remove trustees, make alterations to the class of beneficiaries and change the proper law and forum of administration of the trust. It is also possible to reserve powers to direct the trustees in relation to the investment of the trust fund; for example to ensure that a family business is retained in the trust. It is also possible to reserve trustee powers concerning distributions over trust income and capital, both of which are appealing to HNW families who wish to implement a comprehensive succession plan, but retain a level of control.
BVI VISTA trust
The BVI specialist trust legislation is the Virgin Islands Special Trusts Act (VISTA), which disengages certain traditional trustee duties in relation to certain trusts that own shares in BVI companies. When a BVI company’s shares are held in a VISTA trust, the directors of that company are free to administer the company as they see fit, without intervention from the trustee (except in extreme circumstances). Key family members may be involved by controlling the BVI company as directors (subject to the standard onshore advice) thereby retaining control of the underlying assets within the limitation of the structure. In addition, key family members may take up the role of Office of Director Rules Appointor. This role is a specific feature of a VISTA trust and allows the Appointor, which can be a committee of family members or trusted advisors, to have control over the members of the board of the BVI company. The BVI VISTA Trust is key for families looking to have succession planning in place and still retain some level of control, as often the element of giving up significant control is seen as a key deal-breaker for HNW families in the Middle East. The VISTA trust regime also allows for the option of the future disapplication of VISTA on a certain event during the lifetime of the trust, enabling a VISTA trust to convert into a pure discretionary or reserved powers BVI trusts. This disapplication of VISTA may occur on the death of the settlor where the settlor may be concerned that the family will not be able to manage certain affairs appropriately after his/her death.
Popular BVI structures in the Middle East
There are specific common scenarios in the Middle East where BVI structures have proved particularly popular, such as:
Operating family business structures
Under normal circumstances, a trustee is to act prudently in relation to trust investments which can have unintended consequences in the context of controlling interests in company shares. This rule has particularly been found to be unfavourable where trusts are used as succession vehicles for family businesses. Where the VISTA trust regime does not apply to a trust, the trustee is under a duty to be prudent and monitor the conduct of directors of the company and to intervene where necessary in the company’s business, e.g. to prevent the company from entering into an unduly speculative venture.
However, BVI VISTA Trust structures allow a HNW family to retain control and run a family business without the concerns that the trustee will be involved in the running of the day-to-day business. Thus, allowing the family to retain its sense of control and comfort in its personal business dealings.
Specific BVI legislation, similar to a number of other offshore jurisdictions, has been enacted to seek to prevent claims for fixed shares in a deceased’s estate passing to certain family members. These provisions of the BVI trust laws are arguably the most robust and sophisticated in protecting trusts (and dispositions to their trustees) against such “forced heirship” claims. This has made the BVI a highly attractive jurisdiction for settlors who come from states in which such laws apply. This allows HNWI families to establish trusts in order to be able to determine the devolution of their assets and, in effect, replicate the testamentary freedom that in general applies in common law jurisdictions, such as the BVI.
Over recent years, the general risks involved in holding cryptocurrency as part of a trust fund have been extensively debated in the private wealth industry. A trust can undeniably provide an effective solution for individuals looking to put in place efficient succession planning for their digital assets. However, a number of professional trustees have been, and remain, cautious and often reluctant to hold assets of this nature, The trustee’s reluctancy to hold digital assets often relates to their volatility, risk and overall difficulty in aligning such holdings with the trustee’s various fiduciary duties, including the duty to safeguard the trust assets and preserve their value. However, a BVI VISTA trust can provide an outstanding solution to this quandary by diluting the trustee’s responsibilities in relation to the digital assets and instead allowing the settlor, or others, as directors of the BVI Company in the trust to take a hands on approach in managing the digital assets.
Family office structures
The concept of family offices in the Middle East (in particular the United Arab Emirates) has gained popularity and momentum, with the number of single and multiple family offices increasing every year.
Most commonly, there appears to be a need for a succession plan for the family office structures. This is where a BVI VISTA trust or BVI PTC structure (or a combination of the two) can come in play as the optimum succession-planning tool, mainly due to the ability for the family to retain effective control of the underlying structure.
The Middle East has grown exponentially with regards to the amount of HNW families relocating to the region to reside, due to the favourable legal landscape, political stability and financial opportunities. Many of the domestic structures in the Middle East offer sophisticated structuring; however the BVI still sits among the most flexible and efficient jurisdictions when it comes to bespoke structuring and succession planning. The COVID pandemic stressed the sheer significance of wealth and succession planning and HNW families are constantly seeking ways to structure their global assets to provide them with adequate and prudent planning for the generations to come. In many cases, the collective use of domestic and international structures can achieve a higher degree of asset protection and security.
The content of this article intends to provide a general guide to the subject matter. Please liaise with one of our lawyers should you need personal advice for specific circumstances.
This article was first published in The Oath Magazine in December 2022.