The following is the first of a four-part series written by Chris McKenzie
One
Underlying assets are not trust assets.
One sometimes comes across provisions in trust deeds and other trust documentation which refer to the underlying assets of companies, the shares of which are held by the trustee of the trust. Similarly, on occasions, trust instruments include provisions giving settlors and protectors powers of direction over such assets, for instance as a result of reserved investment powers.
It has for over 120 years been a fundamental feature of company law that the assets of a company belong to the company and not to its shareholders (except in the relatively rare situations in which the company’s assets are held by it as bare trustee or nominee for such shareholders). This rule of law underpins the BVI’s VISTA trust legislation which makes a clear distinction between the trust assets (the shares in the company) and the company’s own assets. Were the situation to be otherwise, this would entail disregarding the integrity of the company as a separate legal entity, i.e. piercing the corporate veil – something which courts tend to be very reluctant indeed to do except, say, in cases of fraud.
It follows from this that it is the directors of the company in which the trustee holds shares, and not its shareholders (i.e. the trustees) who are responsible for investment decisions relating to the company’s assets and that provisions in trust deeds that contain dispositions relating to the company’s assets (or how they are to be invested) should be avoided since they make no sense at all.
Two
The valid/invalid trust – the ‘pincer movement’
Sometimes it seems more or less clear that a trust is no more than a bare trust and that its dispositive terms are ineffective i.e. for instance because the trust deed is no more than a ‘will substitute’ and the trust assets still belong beneficially to the ostensible settlor (or his or her estate).
Fortunately, such trusts are far less common than they were before the mid-1990s when there were no specialist trust lawyers in the BVI and, as a result, trust deeds were drafted by lawyers from other jurisdictions (such as US lawyers) the trust laws of which differ significantly from those of English (and in this respect BVI) law. However, one still comes across them from time to time.
In other cases, it is not wholly clear whether a trust is valid in accordance with (at least some of) its terms or whether it is, rather, a will substitute. After all, albeit that this is not a formal rule of law, the courts, applying principles of equity, do have a tendency to uphold the validity of trusts.
In such other cases, it would usually be advisable to make an application to the court for directions – i.e for a ruling on this issue and this would protect the trustees. An alternative, however, can sometimes be to cover both the possibility that the trust may be valid on the one hand and the possibility that the trust assets still belong beneficially to the settlor on the other. In practice this may often involve preparing a deed of appointment pursuant to dispositive provisions in the trust (if there is, say, a sufficiently widely drafted overriding power of appointment in the trust deed and the ‘proper purpose rule’ is being complied with). That would cover the possibility that the trust is valid. The possibility that it is invalid could be covered by making the settlor a party to the deed and including a provision in it to the effect that settlor re-declares the trust on appropriate terms.
Three
Shares are not immovable property.
Different laws apply to the succession of movable property on the one hand and immovable property on the other. In the case of immovable property, BVI law applies to the determination of most issues relating to succession, whereas, in the case of movable property, such issues are usually (but not exclusively) determined by other laws (see further below).
Section 245 of the BVI Business Companies Act provides that ‘For the purposes of determining matters relating to title and jurisdiction, but not for the purposes of taxation, the situs of the ownership of shares… of a [BVI] company is the Virgin Islands.’
It does not follow that from this that shares in the BVI company would be regarded as immovable property. They will be regarded as movable property pursuant to the common law principles of English private international law which apply in the BVI.
Four
The law of the testator’s domicile at death governs the formal and essential validity of a testator’s BVI will.
BVI lawyers are frequently asked how BVI-specific wills dealing with shares in a BVI company owned by non-BVI domiciliaries should be executed in order to comply with BVI law.
As a consequence of the principles of English common law and equity which apply in the BVI, the law governing the formal and essential validity of a will disposing of movable property (such as shares in a BVI company) will be determined by the law of the deceased’s domicile at death. This is the case, notwithstanding the fact that a BVI grant of probate will be needed following the testator’s death and notwithstanding the fact that there are provisions in the will stating that it will be confined to BVI-situs assets (e.g. shares in a BVI company) and/or that it is to be interpreted in accordance with BVI law.
Importantly, and this is often misunderstood by those from civil law jurisdictions, ‘domicile’ is a technical legal concept and is not always the same as nationality or residence.
It follows that unless the shareholder dies domiciled in the BVI, BVI law will not actually determine how will should be executed (and any other formal requirements such as any registration or notarisation requirements which must be satisfied) in order to be regarded as being formally valid. Advice on those issues should be taken from a lawyer based in the jurisdiction in the testator is domiciled and those issues should be revisited should the testator change their domicile – something which is increasingly common. This is essential because, on applying for a BVI grant of probate following the testator’s death, the documentation which will need to be produced to the Probate Registry in the BVI will include a sworn statement stating where the testator is domiciled and, and if the testator dies domiciled outside the BVI, an affidavit from a lawyer based in that jurisdiction stating that the will is both formally and essentially valid under that jurisdiction’s laws. Without these documents, probate cannot be obtained.
In (the many) situations in which it is not clear where the testator is actually domiciled, it would be advisable to ensure that the will is executed in accordance with the formal requirements of each of the jurisdictions in which the testator may arguably be domiciled (i.e. to cover all possibilities).
These issues are explained further in the article which is to be found by clicking on the attached link: https://onealwebster.com/bvi-wills-and-the-impact-of-non-bvi-laws/
Five
Never refer to the settlor of trust of which you are trustee as your ‘client’.
Registered Agents may well have clients, but trustees certainly do not have clients. References in emails and other documents to settlors as ‘clients’, and to ‘taking instructions’, will provide anyone with an incentive to do so with ammunition to challenge the validity of the trust on the basis that it is a sham (i.e. that, despite the express terms of the trust, despite the trustees’ discretionary powers as set out of the trust deed and despite their ostensible fiduciary duties they are no more than the settlor’s nominees).
If the trust were held to be a sham, the trustees may well have significant exposure to liability since, amongst other things, the indemnification and exoneration provisions in the trust instrument will not have been effective and the trustee will potentially need to reimburse any fees which it has charged (on the basis that the charging clause in the trust instrument will be ineffective). Furthermore the trustee could have significant exposure to creditors, tax authorities and others. It will moreover potentially have substantial exposure to liability in relation to investment decisions and invalid distributions which have been made on the basis that the trust is valid in accordance with its terms.
The trustee may be required to produce the relevant emails and correspondence to those challenging the validity of the trust in applications to the BVI court which are made on the basis that the trust is a sham in discovery proceedings.
All references to settlors as ‘clients’ or taking ‘instructions’ are therefore best avoided.
The second in this series will be published during the course of the second quarter of 2025. It will cover (a) gifts to BVI companies, (b) the need to include accrual clauses in wills, (c) the effect of arbitration clauses in trust instruments, (d) why trust instrument should not refer to ‘primary’ and ‘secondary’ beneficiaries and (e) what happens on the death of a sole trustee or nominee or beneficiary of a bare trust.
