O’Neal Webster is pleased to announce that the ‘firewall’ provisions in the BVI’s Trustee Act are now to be made more robust as a result of amendments to section 83A of the Trustee Act which are expected to come into effect shortly.
Background to the need for firewall provisions
Since trusts governed by the laws of the BVI usually have significant links with the laws of one or more other jurisdictions, it is essential for the Territory to have adequate rules for resolving ‘choice of law’ questions relating to trusts. It is also essential for jurisdictions to have ‘firewall provisions’ insulating BVI trusts and trustees against what are known as ‘forced heirship’ claims. Such firewall provisions were initially aimed at protecting trusts against such claims, but, increasingly, they are now used to protect trusts against matrimonial claims; when clients and their advisers are involved in ‘jurisdiction shopping’, they consider the effectiveness of these provisions in the context of which jurisdiction to use to set up trusts.
Section 83A of the Trustee Act was crafted with the assistance of Professor Jonathan Harris QC (Hon.) of London University. Professor Harris is now a general editor of Dicey, Morris & Collins – the Conflict of Laws, the leading English text on private international law, and is nowadays considered to be the foremost English expert on conflict of laws relating to trusts.
After section 83A of the Trustee Act came into force on 1 March 2004, it was generally appreciated that the Territory had in force firewall provisions which were as robust as those of any other offshore trust jurisdiction and also, independently, and largely as a result of Professor Harris’s input, generally had the most refined and comprehensive conflict of laws rules in the world relating to trusts.
Since section 83A came into force over 15 years ago, there have been a number of significant international developments in this area. First, various other jurisdictions with which BVI competes for international business have either introduced new laws dealing with conflicts in relation to trusts or refined their existing laws to address various perceived defects. Secondly, as is mentioned above, in contrast to the position prior to March 2004 when section 83A of the Trustee Act came into force, at which stage the principal objective of such ‘firewall provisions’ was to insulate trusts against forced heirship claims, the overarching aim of firewall provisions in the BVI and elsewhere is nowadays considered to be protecting trusts against matrimonial claims. Indeed the vast majority of court actions in the BVI and its main competitor jurisdictions in which firewall provisions are invoked actually relate to such claims rather than to forced heirship claims.
In view of the issues which are referred above, combined with the perceived importance of having the most robust firewall provisions available, the Trust and Succession Law Review Committee of the BVI Branch of the Society of Trust and Estate Practitioners (STEP) undertook a detailed review of the Territory’s firewall offering, and that of our relevant competitors, with a view to identifying areas in which improvement would be desirable and Professor Harris also assisted with the formulation of recommendations which are referred below. The amendments in question are aimed at creating greater certainty for those using the BVI as a jurisdiction by adopting clearer legislation and providing protection against attacks by foreign courts, by ensuring that any issues in relation to BVI trusts are determined according to the relevant principles of its own trust laws and by its own courts, whilst ensuring that BVI trusts cannot be used as a means for settlors to evade their legal obligations to others.
Refinements to section 83A of the Trustee Act
Amended definition of ‘personal relationship’
Subsection (13)(b)(i) of section 83A, amongst other things, prevents a ‘Virgin Islands trust’ from being set aside on the basis of rights conferred by foreign laws by reason of ‘personal relationships’ to the settlor. Furthermore subsection (16) essentially provides that the law designated as being applicable to succession by the Territory’s rules of private international law will only be applicable to the extent that it does not contain rules conferring rights on persons by virtue of ‘personal relationships’ to the settlor.
The term ‘personal relationship’ is defined by subsection (1) to include ‘every form of relationship by blood or marriage, including former marriage’ and the definition goes on to specify when, in particular, ‘personal relationships’ between two people exist.
The definition in subsection (1) will now be expanded and modernised so that it will cover step-relationships and children born by artificial fertilisation and surrogacy. Relationships to beneficiaries (including objects of dispositive powers) are also covered by the revised definition, i.e. because before the recent reforms only relationships to settlors were included. As a result of these changes, it will be a lot more difficult for those whose claims are based on their relationships to beneficiaries rather than those to settlors and for step-children and other relations falling within the amended definition to make claims against BVI trustees and BVI trusts.
Reservation of all questions to BVI law
Subsection (12) of the Trustee Act defines the scope of application of the law applicable to trusts as set out in article 8 of the Hague Trusts Convention.
The opening provisions of subsection (12) have now been tightened up by making it clear that ‘all questions arising in regard to a trust’ are to be determined by the laws of the Territory (i.e. not merely those questions which are specified on the list that follows such opening provisions).
Furthermore, the list which follows those opening provisions of subsections (12) will be expanded to include the capacity, powers, rights and obligations of all relevant persons, not simply those of the trustees. Such persons include settlors, protectors, investment advisers (where they have powers under a trust), enforcers and beneficiaries (including objects of powers of appointment).
These amendments should both (similarly) make claims based on foreign laws much less likely to succeed and ensure that all relevant issues are determined by the laws of the BVI, which are of course, amongst other things, designed to insulate trusts against various forms of claim, rather than by foreign laws which may be less favourable.
Deprivation of rights, claims or interests
Subsection (13), as originally worded, states that, subject to any express provision to the contrary in the trust or disposition, the trust itself, or the transfer of property on trust, shall not be rendered void, voidable or in any way defective, the settlor’s capacity shall not be questioned and the rights and liabilities of the trustees or beneficiaries shall not be affected by the fact that the law of any foreign jurisdiction does not recognise the trust concept; it also insulates trusts in identical terms from rights conferred by personal relationships to the settlor or any foreign rules or judicial, administrative or arbitral orders conferring such rights.
Subsection (13) will be strengthened by:
- providing that ‘claims and interests’ are protected, i.e. in addition to ‘rights’;
- subjecting the capacity of the trustee, beneficiary, protector, enforcer or any object of a power to BVI law, as well as that of the settlor; and
- covering rights conferred by a personal relationship to a beneficiary, as well as one to the settlor.
It is anticipated BVI’s enhanced firewall offering will be found to be especially attractive to those who have concerns that family members may make claims against trusts which are based on ‘personal relationships’ or ‘heirship rights’, whether they be trusts which, say, their spouses or parents have settled or (following the recent amendments) trusts of which they are simply beneficiaries.
As most sophisticated clients and trustees appreciate, however, it is imperative that detailed advice on how the relevant trust is structed be obtained from lawyers from the settlors’/beneficiaries’ home jurisdiction – as well as from BVI lawyers with the relevant trust expertise: in this area it is of paramount importance that any trust is properly structured with a view to eliminating, to the greatest extent possible, the prospects of any claims succeeding and obtaining the best possible advice is therefore crucial.
These amendments were made following detailed recommendations from the Trust and Succession Law Review Committee of the BVI Branch of STEP. The Committee is chaired by O’Neal Webster Partner Chris McKenzie and was formerly chaired by O’Neal Webster Managing Partner Vanessa King who still serves on the Committee. Vanessa is also chair of the BVI Branch of STEP and was recently elected as chair of STEP’s Caribbean and Latin America Region.
If you would like any further information about these reforms, please contact your O’Neal Webster adviser.