By Christopher McKenzie
for Trusts & Trustees, Oxford University Press
Background—why reserved power legislation has been enacted
Many prospective settlors, especially those from jurisdictions or family backgrounds in which trusts do not feature,1 the establishment of a lifetime trust can involve a rather significant leap in the dark. This is so, because, once such a trust has been established, the settlor would have no control over its administration – that is, unless the trust instrument expressly reserves rights to him or her. These concerns of settlors about relinquishing ownership and control will indeed be particularly prevalent in the case of a trust which is established as a discretionary trust and where especially wide powers are conferred on their trustees.2
The administrative powers of BVI trustees are usually similarly extensive: unless the trust is established as a VISTA trust3 they would in most cases have the power to sell the assets which the settlor has transferred to them on establishing the trust and to reinvest the proceeds in other assets of their selection.
If the relevant principles of English law are applicable to a trust, it is thought that a settlor may reserve substantial powers to him or herself,4 but some commentators have suggested that there is, and indeed there clearly must be, a limit, but there is some uncertainty about where precisely the line should be drawn given that there is very little satisfactory case law directly on this point. In North America, however, trust law has developed rather differently and there it seems that the settlor can, during his or her lifetime, have more extensive dominion without creating only a bare trust which arises as a matter of English law when powers and rights of such substance have been reserved to the settlor that it cannot be said that he or she has parted with any beneficial interest in the relevant property.5
If the relevant principles of English law are applicable to a trust, it is thought that a settlor may reserve substantial powers to him or herself, but some commentators have suggested that there is, and indeed there clearly must be, a limit, but there is some uncertainty about where precisely the line should be drawn given that there is very little satisfactory case law directly on this point.
As a consequence of the issues highlighted above and in view of the increasing desire for modernisation which satisfies the legitimate expectations of prospective settlors – as well as a need to introduce an element of certainty for settlors who wish to set up trusts in jurisdictions such as the BVI in which the relevant principles of English law would otherwise apply – numerous international financial centres, commencing with the BVI, have introduced reserved power trust legislation. They have done this with the dual objective of providing the requisite certainty and of meeting settlors’ wholly legitimate needs and expectations.
The BVI was the first jurisdiction to introduce reserved power legislation in 1993
This is not generally appreciated, but the British Virgin Islands was actually the first international financial centre to enact legislation providing for settlor reserved powers. This was contained in the original version of section 86 of the BVI’s Trustee Act (which was inserted into the original Act by the Trustee (Amendment) Act, 1993). However, the provisions of section 86 of the Trustee Act were in some respects regarded as problematic and outdated especially given that some of the BVI’s competitors had since enacted what is generally regarded as more comprehensive legislation in this area.
This is not generally appreciated, but the British Virgin Islands was actually the first international financial centre to enact legislation providing for settlor reserved powers
The original version of section 86 of the Trustee Act provided that a trust instrument may contain provisions by virtue of which the exercise by the trustees of any of their powers and discretions is subject to the consent of the settlor or others such as a protector or protective committee and that certain specific powers may be reserved to the settlor or conferred on a protector or others (such as the power to change the proper law, trustees or beneficiaries of the trust and consent powers). It also provided that any person exercising specified powers would not, as a consequence, be regarded as a trustee and that, unless otherwise provided in the trust instrument, would not be liable to the beneficiaries for bona fide exercise of the power.
Whilst this is broader in scope and is not solely designed to address the issue of settlor control, the BVI’s VISTA trust legislation (enabling trusts over shares in BVI companies to be established under the Virgin Islands Special Trusts Act, 2003) also provides a mechanism by which the settlor can, if he or she wishes to do so, reserve control over investment and other administrative matters at the director (company) level.6 The VISTA trust legislation is however inevitably a lot more sophisticated and not specifically directed, as such, to enabling reserved power trusts to be established, albeit that it can effectively be used as a perfect way to confer administrative powers such as investment powers more or less exclusively on those concerned. There is therefore nothing to be found in the VISTA itself which states, specifically, that powers may be reserved to settlors and others (such matters being left to draftspersons and those involved in setting up structures) and, as a result, not everyone will be aware of the specific feature of the legislation which has resulted in it being described by a well-known English QC as ‘the mother of all reserved power trusts’.7
Comparative review undertaken
Since section 86 of the Trustee Act came into force on 1 November 1993, all or virtually all the BVI’s competitors, such as Jersey, Cayman, The Bahamas and Bermuda, have introduced bespoke reserved power trust legislation and a review of this legislation was undertaken for the purposes of formulating the provisions of the new section.
In the light of some of the issues which arose in relation to the earlier version of section 86, and given the more fulsome legislative provisions which have been enacted rather more recently by some of the BVI’s competitors, a much more up-to-date statutory provision, which has been modelled on the best features those jurisdictions’ legislation but which omits their more controversial provisions, now replaces the earlier version of section 86 of the Trustee Act. It came into force on 9 July 2021.
given the more fulsome legislative provisions which have been enacted rather more recently by some of the BVI’s competitors, a much more up-to-date statutory provision, which has been modelled on the best features those jurisdictions’ legislation but which omits their more controversial provisions, now replaces the earlier version of section 86 of the Trustee Act
New section 86 of the Trustee Act
The new section 86 is worded as follows:
The reservation by the settlor to himself or herself or the grant to any other person or to any office holder or body, including (but without limitation) a protector or protective committee, in a trust instrument evidencing and recording a trust governed by the laws of the Virgin Islands of any limited beneficial interest in the trust property whether of income or capital, or any or all of the powers specified in subsection (2) or both such an interest and any or all of such powers, shall not—
invalidate the trust; or
prevent the trust taking effect according to its terms; or
cause any of the trust property to be part of the estate of the settlor for the purposes of succession on death, whether testate or intestate.
The powers referred to in subsection (1) are—
in the case of a reservation to the settlor or other donor of trust property, power to revoke the trusts in whole or in part;
power to vary or amend the terms of a trust instrument or any of the trusts, purposes or powers arising thereunder in whole or in part;
a general, intermediate or special power to advance, appoint, pay, apply, distribute or transfer trust property (whether income or capital or both) or to give directions for the making of any such advancement, appointment, payment, application, distribution or transfer;
power to act as, or give binding directions as to the appointment or removal of, a director or an officer of any company wholly or partly owned by the trust or to direct the trustee as to the manner of exercising voting rights attaching to any of the shares held in such company;
power to give binding directions in connection with the purchase, retention, holding, sale of or other commercial or investment dealings with trust property or any investment or reinvestment thereof or the exercise of any powers or rights arising from such trust property;
power to appoint, add, remove or replace any trustee, protector, enforcer or any other office holder or any advisor, including any investment advisor or any investment manager;
power to add, remove or exclude any beneficiary, class of beneficiaries or purpose;
power to change the proper law of the trust;
power to change those of the terms of the trust which specify which courts have exclusive or non-exclusive jurisdiction in any proceedings involving rights or obligations under the trust; and
power to restrict the exercise of any powers, discretions or functions of a trustee by requiring that they shall only be exercisable with the consent, or at the direction of, any person specified in the trust instrument.
No person, other than a person in whom trust property or an interest in trust property is vested, shall be or become a trustee by reason only of the reservation or grant of any of the powers set out in subsection (2).
Subject to any contrary provision herein, this section applies to any trusts governed by the laws of the Virgin Islands, whether created before, on or after the date on which this section comes into force, and to acts and omissions occurring while the trust was governed by the laws of the Virgin Islands.
In this section, “settlor” includes—
a testator who grants powers under a testamentary trust by the terms of his or her last will and testament and
a person who by a declaration of trust declares that assets held by him or her beneficially shall be held by him or her on the terms of the trust so declared.’
Subsection 2(4) of the Trustee Act (which reflects corresponding provisions in the Hague Trusts Convention) has also been amended to make it clear that it is not only the reservation of powers to settlors, but the grant of powers to others that will not (as a general rule) invalidate a trust.
Intentional omission of references to ‘fiduciary’ powers and of provisions exonerating trustees
There is in the new section no equivalent to the provisions in some of our competitors’ legislation which specify that a trustee which acts or refrains from acting pursuant to reserved powers will not commit a breach of trust. Such provisions in our competitors’ legislation have been the subject of academic criticism on the basis that their purpose and effect is not at all clear. Nor, similarly, have provisions specifying the extent to which the trustee has fiduciary or other duties been included in it, i.e. because the term ‘fiduciary’ is not clear cut and it was thought that uncertainty in this area would be particularly undesirable.
It is now considered that, especially when considered in conjunction with its VISTA trust legislation, the BVI now has by far the most comprehensive, sophisticated and attractive reserved power trust legislation in the world.
It is now considered that, especially when considered in conjunction with its VISTA trust legislation, the BVI now has by far the most comprehensive, sophisticated and attractive reserved power trust legislation in the world
Such as those from civil law countries (eg those in mainland Europe and Latin America) and Muslim countries.
English trusts will seldom reserve substantial powers to the settlor in view of the taxation consequences which will usually arise, although some English law reserved powers trusts have been used by settlors from jurisdictions in Latin America and elsewhere where traditional international financial centres have been blacklisted.
I.e. one established pursuant to the Virgin Islands Special Trusts Act, 2003 (as amended).
For example, see the discussion in Drafting British Virgin Islands Trusts (Kessler, Pursall and Chand, Sweet & Maxwell, 2014) at 16.11 (Settlor reserved powers); see also Lewin on Trusts(19th ed, Sweet & Maxwell, 2015) at 1-015.
This issue is explored in pages 340–343 of part I of Chris McKenzie’s article Having and Eating the Cake: A Global Survey of Settlor Reserved Power Trusts which was published in two parts in Private Client Business (Sweet & Maxwell)  September/October 336–345 and  November/December 428–440. Please note however that this article pre-dated recent case law developments and also, of course, pre-dated the recent enactment of legislative provisions in various jurisdictions.
The use of VISTA trusts as settlor reserved power trusts is explored in pages 429–433 of part II of the article which is referred to in footnote 4 above.
The VISTA trust legislation is summarised in the author’s article, A new and improved VISTA, Trusts & Trustees, vol. 19, no.10, December 2013.
Christopher McKenzie, British Virgin Islands Trusts & Estates Partner at O’Neal Webster (UK) LLP. The author chairs the STEP committee, the proposals of which led to the enactment of the Trustee (Amendment) Act, 2021 and all the BVI’s other trust and estate innovations over the last 20 years. Email: email@example.com.