Friday, February 22, 2008It's a matter of Trust

Sjoerd Koster and Nicholas LaneInnovative Wealth Planning

With the record number of Business Companies registered in the British Virgin Islands and few simple and practical wealth planning options available for ensuring the valid transfer of shares upon the shareholder’s death, the Virgin Islands Special Trust act 2003 (VISTA) legislation, provides a very favourable framework for succession for BVI company shares. It allows the owners to benefit from the attractive features of a trust, such as the certainty of succession planning, without the costs, complexity and trustee interference in the operations of any private company, that have become the hallmark of traditional trustees. These benefits significantly enhance and ease the professional wealth planner’s ability to meet their client’s expectations and reinforce the profile of the BVI, as one of the most popular offshore jurisdictions offering sensible and practical solutions.

Over the last 20 years, the BVI has seen a tremendous growth as a corporate domicile, with some 65,284 new BVI companies incorporated in 2006 alone. The BVI has undoubtedly turned into one of the most popular offshore jurisdictions and the BVI Business Company is the most commonly used offshore entity.“How can I arrange for the transfer of my business when I pass away without making it a burden for my family?” This is a common question asked by owners of successful business companies. With this tremendous growth in the number of companies incorporated, a clear need has arisen, for easy and simple succession planning without the disadvantages of the traditional methods such as a will, a lifetime gift or trust. If an owner of BVI company's shares dies, those shares cannot be validly distributed until the deceased’s BVI or foreign will has been probated in the BVI Courts (probate is the legal process for validating a will and giving the executor permission to distribute the estate). This is a public procedure and will mean full disclosure of the ownership of the BVI Company including the identity of those who will ultimately inherit the company’s shares and the company’s assets. Obviously, confidentiality is a core concern of many BVI company owners, and the prospect of public disclosure of ownership will be unappealing.

An application to the BVI Court is also very costly and the process rarely takes less than six months. During this period of probate, the beneficiaries would be unable to deal with the company’s assets and any bank or investment accounts owned by the company may be frozen.

Another consideration is the rules of succession in the shareholder’s country of domicile. For example, if you decide to leave 100% of your BVI company shares to your children and you state this in either your BVI or foreign will, the BVI courts will still look to the law of your home jurisdiction to govern the succession of the shares. If your home jurisdiction states that 50% of the assets, in this case BVI company shares, should go to your wife, then your home jurisdiction’s rules would be recognised and enforced in the BVI leaving your children with only 50% of their inheritance.

A very simple method of passing your BVI shares to your heirs without these concerns would be to gift them before your death, or indeed to register you and your heir/s as joint tenants or owners. Whilst this is a low cost solution, it does not account for a dispute or change of heart, can be impossible to reverse and creates quite obvious control issues.

At the other end of the scale, trusts have long been regarded as one of the best succession planning vehicles, but there has always been a conflict between the obligations of the trustee and the needs of the business owner to run their business. Simply put, the trustee will generally wish to take a greater role in the management of the company than will often be acceptable to the settler.What happens without valid succession planning?“What rights do I have as beneficiary or heir?” With so many BVI entities incorporated and used worldwide, it is important to reflect upon the possible risks and problems of not having proper succession planning arrangements for your BVI Business Company.

If the shareholder dies without a will, or if the foreign will does not mention the BVI company, the probate process can be lengthier, the costs higher and the estate may not even be distributed in accordance with the deceased’s wishes.

Many have mistakenly used nominee agreements as a method of transferring ownership of their shares upon death. This is an arrangement under which company shares are held by a third party on another person’s behalf. However, a nominee arrangement does not validly provide for succession of shares in a BVI company in the event of the owner’s death and can bring about prosecution and a considerable personal liability for the nominee.

How to solve wealth planning for BVI companies“So how do I avoid spending time, money and losing sleep?” One of the most effective low cost succession planning solutions available for owners of BVI company shares, involves a very simple life interest trust written under VISTA. This relatively new legislation offers a greater level of freedom and protection for the business owners of BVI companies by releasing trustees from their obligations under the English Trust Law known as the ‘Prudent Man of Business Rule”. VISTA makes this possible by removing the responsibility of trustees of monitoring and (where necessary) intervening in the management of the company, ensuring the shareholder may control his company during his lifetime.

However, whilst VISTA allows for the settler to manage his company, it does not address the issue of the shareholders’ rights – if an individual places his shares in trust, the company shares will typically be registered in the trustee’s name, meaning that the trustee may be able to vote the shares, and receive dividends as the shareholder of record. BVI practitioners have solved this problem through the linkage of the VISTA trust with a rights deed. The rights deed formalizes the transfer of the shares to the trustee, but leaves the beneficial rights – voting and income for example, with the settler. Upon the settler’s death the rights will vest, and the trustee has to distribute the shares to the beneficiaries identified in the trust deed by the settler. It offers a practical alternative, allows the settler to continue to manage the company and enjoy the rights of the shares, but does provide the certainty of succession planning and confidentiality of a traditional trust. The simplicity of the arrangement guarantees that the trustee will transfer the shares to the listed beneficiaries, but is prohibited from involving himself in the management of the company.

This succession planning arrangement guarantees confidentiality, may be cancelled at any time should the settler be unhappy with the arrangement, and is far less costly than a traditional trust structure.

Shareholders who overlook making valid testamentary arrangements for their BVI company shares run a serious risk of their assets being distributed in a manner inconsistent with their wishes, and of attracting considerable delay, costs and publicity. This arrangement is a natural compliment for any prospective buyer or current holder of BVI Company shares who has not made any arrangements for valid succession.

Oyster Publications Inc, PO box 3369, Road Town Tortola, British Virgin Islands, VG1110