Non Charitable Purpose Trusts

Background

Historically, with limited exceptions, trusts for purposes rather than beneficiaries were refused recognition by the courts. The principal obstacle to recognition was the trustees' duty to account and the fact that this requires beneficiaries to enforce the duty. Charitable trusts were treated as an exception because they could be enforced on behalf of the general public by the Attorney General. There were one or two other limited exceptions (eg trusts for the maintenance of tombs) but these were generally regarded as anomalous.

Most leading offshore jurisdictions have introduced legislation enabling the creation of non-charitable purpose trusts ('purpose trusts') and a great deal of use is made of this legislation, particularly in the commercial context (in order to take advantage of one of the features of such a trust which is that there is no beneficial owner of the trust's assets). Examples of the commercial use of purpose trusts include taking transactions off balance sheet, isolating assets in financial deals, separating voting from economic control and providing ownership structures for private trust companies.

Prior to the most recent reforms, the British Virgin Islands' purpose trusts legislation was to be found in section 84 of the Trustee Act which came into effect in November 1993, but this legislation was reviewed comprehensively in the light of amendments which had been made to other offshore jurisdictions' legislation, various commentaries which had been written by experts and some issues which had arisen in practice since section 84 of the Trustee Act came into effect. The Trustee (Amendment) Act, 2003, which came into force on 1 March 2004, introduced new purpose trusts legislation which provides a more comprehensive, clearer and more robust regime for all purpose trusts which are created on or after that date. The new section (section 84A) is based on section 84 of the Trustee Act (which still applies to purpose trusts set up before 1 March 2004), but a number of highly desirable modifications have been made.

Features of the BVI's purpose trust legislation

Conditions

Section 84A of the Trustee Act permits purpose trusts to be created if the following conditions are satisfied:

1. the trust's purposes must be specific, reasonable and possible;
2. the purposes must not be immoral, contrary to public policy or unlawful;
3. at least one trustee of the trust must fall within the statutory definition of a 'designated person' (and this would normally involve the appointment of a licensed British Virgin Islands trust company as the sole trustee or one of the trustees of the trust);
4. the trust instrument must appoint a person as enforcer of the trust and must provide for the appointment of another enforcer on any occasion on which there is no enforcer (or no enforcer able and willing to act); and
5. the enforcer appointed by the trust instrument must either be a party to the trust instrument or give his consent in writing (addressed to the trustee who is a designated person) to act as enforcer of the trust.

Section 84A makes it clear that the validity of a trust which would have been valid apart from the BVI's purpose trusts legislation is wholly unaffected, and that the validity of (and the Attorney General's power to enforce) charitable trusts is unaffected by the legislation.

Purpose can be for the benefit of particular persons

The heavily criticised definition of a 'trust for any purpose' (specifying that a purpose trust must not be for the benefit of 'particular persons' or of 'some aggregate of persons') which appeared in the old section 84 of the Trustee Act is omitted from section 84A, with the result that, as with Cayman Islands STAR trusts, the purpose of a trust which is set up under section 84A of the Trustee Act can be to benefit to one or more individuals or companies.

Enforcers

The BVI did not copy other jurisdictions in abolishing the role of the enforcer, on the basis that it was considered that to do so would give rise to a number of undesirable practical and conceptual consequences (eg since the right to enforce the trust is believed to be conceptually critical both to its existence and its effective administration). Instead, provisions are included in section 84A with the objective of ensuring that purpose trusts always have enforcers (ie to prevent an argument to the effect that, if there is at any time no enforcer, the trust will fail). (Section 84A makes it clear, however, that the statutory procedure for appointing an enforcer need not be invoked where it is likely that a new enforcer will be appointed in the very near future in accordance with the mechanism in the trust instrument for effecting such an appointment.)

Section 84 A provides that the enforcer cannot be or become one of the trustees of a purpose trust and, for the avoidance of doubt, the enforcer has been given the express statutory power and duty to enforce the trust.

A trustee of a purpose trust is required to provide the enforcer with the following:

1. the accounts of the trust;
2. copies of the trust instrument and of deeds and other written instruments executed pursuant to the trust instrument;
3. legal and other professional advice received by the trustees; and
4. such, if any, other documents and information as the trust instrument requires to be provided.

The court has the discretionary power to make an award in relation to the enforcer's costs in enforcing the trust.

Perpetual purpose trusts permitted

Section 84A purpose trusts are exempt from the rule against perpetual trusts, with the result that a perpetual purpose trusts are capable of being set up. However, trust instruments have been given the option of specifying a terminating date or event, of providing for the disposition of trust assets on the trust's termination and of providing that (before the trust's termination as a purpose trust) the trustees will owe no duty to any persons entitled on such termination.

Variation

Provisions enabling purpose trusts to be varied (to cater eg for circumstances which have changed since the trust was set up) are included in section 84 A, subject to a number of desirable modifications to make it clear what factors the court is to have regard when varying the trust.

Requirement that one trustee must be a "designated person"

The Territory refrained from abolishing the requirement to the effect that one of the trustees of a purpose trust must be a 'designated person' (such a licensed BVI trustee), since such a requirement was regarded by the KPMG Report as a beneficial protective mechanism, and it was considered that such abolition might lead to abuse. Instead, provisions are included in the BVI's purpose trusts legislation to ensure that a designated person always serves as the sole trustee (or as one of the trustees) of a purpose trust.

In conformity with another recommendation which was made in the KPMG Report, the designated trustee of a purpose trust is required to retain certain essential trust records in the Territory. The records are as follows:

1. the terms of the trust;
2. the identity of any other trustees and the enforcer of the trust;
3. all settlements of the property upon the trust and the identity of settlors;
4. the accounts of the trust; and
5. all distributions or applications of the trust property.

Dishonest appropriation an offence

Section 84A of the Trustee Act also effectively includes an amendment to the BVI's law relating to theft to make it clear that an offence will be committed if the trustee and the enforcer dishonestly appropriate assets of a purpose trust.

Conclusion

This robust and comprehensive new legislation has greatly enhanced the attractiveness of BVI purpose trusts.

The BVI's new VISTA legislation has also augmented the desirability of BVI purpose trusts, since the Virgin Islands Special Trusts Act, 2003 enables both charitable and non-charitable purpose trusts (as well as trusts for beneficiaries) to be set up under that Act; VISTA purpose or charitable trusts are especially attractive where trusts are needed for securitisations and off-balance sheet transactions and to hold shares in private trust companies. (See Walkers' summaries of the new VISTA trust legislation and the BVI's new regulations on private trust companies.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.