The following is the final part of a four-part series written by Chris McKenzie. Need to catch up? Read Part one, Part two, and Part three.
Sixteen
The need to take care when schedules are included in trust instruments
Many trust instruments include schedules which set out in them terms which, whilst not included in the body of the of the relevant trust instrument, will often be very significant. Some of these schedules would typically set out in them, not merely extensive administrative powers provisions, but the names of the initial beneficiaries of the trust, details of the initial trust fund and other factual information such as which of those of the powers of the trustees require obtaining the protector’s prior or simultaneous consent before they are exercised.
It is important that care should be taken both by the draftsperson when adapting the relevant schedules from a precedent and by the trustees when administering a trust which includes such schedules.
One pitfall that should be navigated carefully when adapting precedents is to ensure that either the terms of the relevant schedule are consistent with the terminology which is used in relevant part of the body of the trust instrument which refers to the schedule in question or else that the body of the trust instrument is appropriately adapted so that terminology used in the schedule is both appropriate and effective. For instance, if clause 1.1 of a trust instrument specifies that the ‘Beneficiaries’ are those persons ‘named’ in the schedule, it follows that it is inappropriate for the schedule to include merely references to relationships to a particular person or (especially) for the schedule to contain further dispositive provisions. See also Nineteen below.
Another trap which can exist is that which arises if there is a clause in the trust instrument which specifies that, notwithstanding any of the other provisions in the trust instrument, a list of (sometimes quite numerous) trustee powers which are set out in various clauses in the body of the document can only be exercised after having obtained the prior or written simultaneous consent of the protector, i.e. if the reference to the need for such consent is not actually set out in each of the clauses themselves. This is a potential pitfall because the protector’s consent requirement can then easily be overlooked when administering the trust unless the consent requirement is additionally referred to in the relevant clause which requires it. If the consent requirement is overlooked, trustees could very well face liability for breach of trust.
It may well be best to avoid the use of schedules given the existence of these and other traps for the unwary.
Seventeen
Default provisions conferring discretion on trustees
Most well-drafted trust instruments include default provisions which will specify how the trust assets will be distributed at the end of the ‘Trust Period’, i.e. assuming that the trust is then still in existence. One of the main objectives of including these default provisions in trust instruments is to ensure that there can never be a ‘resulting trust’ in favour of the settlor if he or she is alive or, if he or she is not, in favour his or her estate. A resulting trust will arise by operation of law in circumstances in which the terms of the trust do not fully dispose of the trust property; the terms of a trust will not do this in circumstances in which all the trustees’ discretionary dispositive powers in favour of persons have not been exercised within the period stipulated in the trust instrument (i.e., in most cases, prior to the termination of the ‘Trust Period’ as defined in the relevant trust instrument).
It is very common for trust instruments to define the trust’s ‘Trust Period’ as the trust’s perpetuity period i.e. since BVI law enables trust instruments to specify a fixed period of (now) up to 360 years as the trust’s perpetuity period (that is, instead of the common law period of ‘lives in being plus 21 years’); a 360-year period is now commonly selected.
If the default provisions of the trust confer on the trustees, or another person, the discretionary power to select who may benefit and specify that the selection may be made during a period which extends beyond the trust’s perpetuity period, such provisions will be void for perpetuity (and/or in breach of any express provision in the trust instrument requiring powers to be exercised within the Trust Period). There would, on the other hand, be no objection in principle to the relevant provision specifying that the selection of which beneficiaries may benefit must be made prior to the end of the trust’s perpetuity period (and, if revocable, that it cannot be revoked after the termination of such period).
Similar considerations do not however apply to the selection of charitable purposes during a period which falls outside the perpetuity period, since charitable trusts are not subject to the rule against perpetuities.
Eighteen
The need for VISTA-compatible memoranda and articles
When establishing a VISTA trust, care must be taken to ensure that the underlying company’s memorandum and articles are VISTA-compatible. If the company is a new company, it should be incorporated with such memorandum and articles, whereas if it is an existing company its memorandum and articles should be amended and restated so that they are VISTA-compatible before its shares are settled on trust.
VISTA-compatible memoranda and articles should be adopted for a number of reasons. First, such documents are needed to ensure that the ‘office of director rules’ in the trust instrument will be fully effective. This will usually involve removing any provisions in the company’s articles to the effect that, in addition to its shareholders, directors have the power to appoint new directors. If both have the relevant powers, this might lead to a situation in which the office of director rules are circumvented and thereby thwarted.
In addition, since very limited rights are conferred on shareholders by the BVI Business Companies Act, 2004, most trustees of VISTA trusts will want to ensure that they will have enhanced rights to documentation and information and other rights relating to underlying companies and their subsidiaries in circumstances in which they are effectively emasculated by VISTA. This will, in part, be the case so that they can, whenever relevant, comply with their obligations under section 8 (8) (c) of the VISTA (which relates to the supply of information to beneficiaries and others where – as invariably should be the case – ‘permitted grounds for complaint’ are included in the trust instrument). These enhanced rights should moreover ensure trustees can, in appropriate cases, take action to protect themselves against potential reputational risks in circumstances in which they would otherwise have very limited access to information about the underlying company and few voting powers. The need to protect the trustee against potential future reputational risks is considered essential if the trustee is a professional service provider.
It is however unnecessary, and indeed seldom appropriate, for the company’s memorandum and articles to include detailed references to (or indeed to refer at all to) the Virgin Islands Special Trusts Act.
Nineteen
Provisions to the effect that beneficiaries of discretionary trusts are entitled to specified fractions of the trust fund
It is inappropriate to provide in a trust instrument that, whilst the trust exists as a fully discretionary trust, particular beneficiaries are entitled to specified fractions (or percentages) of the trust fund, i.e. since this would mean that the provisions of the trust would, in effect, be contradictory.
The difficulties which arise in situations in which there is a conflict between (a) the trust’s discretionary provisions and (b) those of the provisions of the trust instrument which purport to confer fixed interests on certain beneficiaries, i.e. the question of which should take precedence, can give rise to unwelcome (and potentially costly) litigation. This happened in the BVI case of Yang Hsueh Chi Serena & Others v Equity Trustee Limited, which involved contested litigation which gave rise to both hearings in the BVI High Court and the Court of Appeal.
If a settlor intends the trust fund of a discretionary trust to be ‘notionally’ divided into various factions, but for the trustees to be able to override such notional allocation, the settlor’s objective can be achieved by setting out his or her wishes to this effect in a non-legally binding letter or memorandum of wishes. If the trustees are not to have such discretion, a fixed interest trust should instead be established.
Twenty
The inadvisability of holding the shares in a PTC in the name of the settlor
When establishing a private trust company, the identity of the shareholder(s) of the private trust company clearly needs to be considered. One possibility is that the shares in the company might be held by settlor and/or members of his or her family (possibly through nominees). If they are not also directors of the PTC, the latter’s articles of association will usually give the shareholders powers to replace directors of the company and this might therefore enable them to exert an element of control. Tax considerations might, however, be relevant.
On the other hand some settlors might not wish to be connected directly with the trustee company, or to be its shareholders, for fear that the trust might, as a result, be regarded as a sham on the basis that local tax legislation might, as a consequence, regard the settlor as continuing to own the trust property as a result of his or her control (or because he or she might thereby have, or be entitled to, access to information about the trust which might be extorted from the settlor in the latter’s home jurisdiction).
As an alternative, if it is advantageous for there to be no beneficial owner of the shares, they might be held by the trustee of a charitable or non-charitable purpose trust; VISTA purpose trusts are very popular in this context because they provide a unique succession mechanism for directorships: it is, in effect, the directors of the PTC which make its decisions.
In this context, it is however essential that care should be taken to cater for succession issues. If the shares in the PTC are held by the settlor or family members (or as nominee for them) the issue of who is to succeed to the shares on their deaths should be considered. This is the case for several reasons. First, when those who hold the shares die, it is likely that grants of probate or letters of administration will need to be obtained in the BVI (assuming of course that the PTC is a BVI company). Secondly, the settlor might be concerned to ensure that the shares will, on the shareholders’ deaths, pass into the hands of the appropriate persons. This would particularly be so if, as would be fairly normal, the shares give the members the right to appoint directors of the company: as mentioned above, directors of a PTC are likely, in effect, to have all the trustees’ powers – and the trustees will probably have a great deal of latitude in terms of, e.g., making capital distributions and exercising administrative powers
It is therefore seldom ever appropriate for shares in a PTC to be held in the name of the settlor.
Christopher McKenzie | Partner – BVI Trusts & Estates/Private Client
O’Neal Webster (UK) LLP
2 John Street, London WC1N 2ES
cmckenzie@onealwebster.com | Tel +44 (0)783 702 5118 | www.onealwebster.com
