Reserved powers trusts in the British Virgin Islands
29 July 2021
Trusts are excellent, flexible structures that allow settlors to divest ownership and control of assets for succession planning and other reasons.
Often, however, settlors are concerned about entirely ceding control over their wealth to a trustee. International financial centres, such as the BVI, have long recognised the need for "reserved powers" trust legislation allowing a settlor to reserve powers, such as the power to hire and fire the trustee, to him or herself or to grant those powers to someone else, often called a protector. Such legislation permits settlors to retain control over the trust without necessarily losing the advantages of using a trust. It also lessens the risk that the trust will be challenged on the basis that the settlor retained too much control and that the trust was, in fact, invalid, illusory or a sham or that the reservation of too much control has meant that the settlor has really retained beneficial ownership of the underlying trust property.
Section 86 of BVI's Trustee Act 1961, which was modernised and replaced in its entirety by the Trustee (Amendment) Act 2021, is aimed at protecting BVI law governed trusts from such challenges.
Section 86 makes it expressly clear that a trust instrument may reserve to the settlor or grant to another person (including a protector or protective committee) (i) a limited beneficial interest, and (ii) a wide range of powers (see below), and that, by reserving such interest or power(s), the trust shall not be invalidated, be prevented from taking effect according to its terms or cause any trust property to form part of the settlor's estate on death.
The wide powers that can be reserved to the settlor or granted to a protector are the powers:
- to revoke the trust;
- to vary or amend the terms of the trust;
- to advance, appoint, pay, apply or otherwise distribute trust property (or to direct the trustee to take such actions);
- to act as director of a company owned by the trust, or to direct the trustee to appoint or remove a director of such company, or to direct the trustee on the manner in which it exercises voting rights attaching to shares owned by the trust;
- to direct the trustee to purchase, retain, hold, sell, etc. trust property (i.e. a power of investment);
- to appoint or remove the trustee, protector, enforcer, etc.;
- to add, remove or exclude beneficiaries;
- to change the trust's governing law and the courts that have jurisdiction over the trust; and
- to restrict the exercise of any power or discretion unless the consent of, for example, the settlor or protector, is first obtained (i.e. veto powers).
Section 86 also provides that a person who holds one or more of the powers described above should not be considered to be a trustee unless trust property is vested in him or her.
It is generally considered that BVI has some of the most sophisticated trusts laws in the world and, particularly when taking into account the VISTA regime (for information on which, see our briefing here) and following the enactment of the Trustee (Amendment) Act 2021, BVI's reserved powers rules are amongst the best available.
If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.