What is your company worth if you cannot transmit it to your heirs?

22 November 2017

How transferring one’s estate is no new question. It has indeed been agitating minds for thousands of years. One multi-century old answer was developed under England’s common law as a concept of inter vivos trust, which has been regarded as one of the best vehicles for succession planning in common law jurisdictions.
Under the common law tradition, a trust is created by a settlor, who transfers title of a property to a trustee. The trustee will hold title to that property in trust and for the benefit of the beneficiaries. Such trust is governed by the terms under which it was created.
Despite its effectiveness, the trust has also long been impeded by legal considerations regarding the liability of the trustee, especially when it comes to the transfer of corporate business due to the “prudent man of business rule”, which imposes on the trustee of shares in a company the following obligations:

  1. (a) The obligation to monitor the conduct of the directors of the company and to intervene where necessary;
  2. (b) The obligation to exploit the shareholding to its maximum financial advantage, which may involve accepting a financially attractive takeover bid for the company, irrespective of the wishes of the settlor; and
  3. (c) The obligation to look for opportunities of spreading the financial risk by diversification, which may involve a sale of the company or its underlying assets, regardless of the wishes of the settlor.

However, attempts to break the walls of the common law boundaries to gain broader international recognition have been made and one of the most notable achievements was the Trust Convention of The Hague dated 1985.
It took some time to ramp up as many signatory States only ratified it after year 2000, but this was definitely an open window for innovation and for some old traditions to be shaken off.
The BVI, which came up with their “Vista trust” under the special trust act of 2003 certainly deserve credits for a having successfully breathed modernity into trust law by making special provisions for trusts of shares in companies and for related matters, including:
  • provision for the retention by trustees of shares in a company irrespective of the financial advantage of disposal,
  • provision for prohibiting trustees from intervening in the management of the company except in certain circumstances, and
  • provision for the appointment and removal of directors of the company in accordance with the terms of the trust instrument.

Most notably, the purpose of the act is to enable a trust of company shares to retain such shares indefinitely, while the management of the company may be carried out by its directors without any power of intervention being exercised by the trustee.
As innovation are sometimes confined to the jurisdiction of the innovator, the act is limited to shares of companies maintained under the BVI Business Companies Act – after all, BVI law cannot rule the world.

This is still far from overshadowing the benefits of the Vista trust, such as:
  • allowing the Settlor to manage the Trust assets through management of the underlying company (including by controlling the appointment, removal and remuneration of the directors)
  • succession planning (Shares of the underlying company can be smoothly distributed to beneficiaries as guided by the Settlor’s wishes.)
  • avoidance of probate: trust assets are not subjected to lengthy, costly and public probate.
  • asset protection from creditors’ claims.
  • confidentiality: trust assets held under a BVI Vista trust allow for the identities and interests of Trust-related parties to remain confidential.
  • Tax Planning, as the trust may be used to mitigate tax liabilities in certain circumstances.

As a result, the BVI Vista trust has well deserved its reputation as ideal solution for those who require the traditional benefits of a trust while seeking to retain control of the assets. This is particularly applicable and beneficial in the case of family businesses.
Please contact us should you have any questions about the Vista Trust

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