What can jurisdictions such as the British Virgin Islands and the Cayman Islands do for HNW Asian families? Do these jurisdictions have all the tools that such clients want? This article addresses some of the issues?

The following article is written by Lucy Hickmet, a senior associate in the litigation and restructuring practice group at law firm Harneys, based in Hong Kong. She writes about the use Asian families can make of structures set up in the Cayman Islands and British Virgin Islands. These are common law jurisdictions – something that people living in places such as Singapore and Hong Kong will be familiar with. Of course, firms such as Harneys are keen to encourage clients to examine such options, but the arguments here are nevertheless worth paying attention to. At a time when some jurisdictions are going through political change, or economic stress, clients need options. And even when times are good, a varied menu of jurisdiction-based structures is worth perusing. We have noticed that a number of these jurisdictions have set up offices in locations such as Hong Kong, with a view to promoting their wares. 

The editors of this news service point out that the usual editorial caveats apply. To join the debate, readers should email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Smart succession planning can be used to sustain family prosperity. The Cayman Islands (CIs) and the British Virgin Islands (BVI) provide effective solutions, tailored to meet the needs of Asian clients.

Asian clients often have concerns about unfamiliar common law trust structures relating to relinquishing ownership and control, confidentiality, and costs. 

The BVI and CIs offer specific wealth management solutions allowing Asian clients greater flexibility and fact-specific succession planning options which can address these concerns as well as issues relating to the risks of, for example, local forced heirship laws overriding testamentary dispositions.

BVI and Cayman Islands tailor solutions
Wills
Wills are simple succession planning tools which do not require individuals to relinquish ownership of their assets prior to death.

The advantages of having a BVI or CIs will is that it aids the transition of BVI and CIs assets following death and streamlines and expedites the probate process allowing BVI or CI’s estates to be distributed in a more timely manner. (1)

Discretionary trusts
Discretionary trusts have commonly been used in Asia with the trustee’s broad powers contained in the trust instrument, and settlors’ focussed intentions for the trust’s purpose conveyed by a letter of wishes.

Trustees are, however, not bound to comply with a letter of wishes where it is in conflict with the terms of the trust. Therefore, a tailored BVI or CIs solution which allows the settlor greater power to retain control over the assets and/or determine how those assets should be dealt with is often the answer.

Share trusts, VISTA and STAR
Assets held in BVI and CIs trusts (and in CIs Foundation Companies (CFCs)), are protected by ‘firewall’ provisions which operate to minimise the threat of foreign laws, e.g. forced heirship laws, against those assets.  Asian clients concerned with privacy are often comforted by the confidential nature of a trust instrument, and the absence of any register of trusts in the BVI or CIs.

The trusts legislation in both the BVI and CIs can permit a wide range of powers to be reserved by a settlor (or granted to others, such as a protector) without affecting the trust’s validity. (2) Trusts can be tailored allowing, for example, the settlor to: remain the director, or select the director, of the company held in trust; retain the power to remove and appoint trustees; and receive any income received by way of dividend from the company held in the trust during his lifetime.

The BVI VISTA regime develops these reserved power provisions by disengaging the trustee from the management of the underlying trust assets, and removing the trustee’s fiduciary responsibility in respect of those assets.

CIs’ STAR Trusts allow the right to enforce the trust (i.e. to bring a claim against the trustee) to be given to the enforcer alone, (3)  which can provide comfort to Asian clients concerned about disgruntled beneficiaries.

PTCs, family offices and CI foundation companies
BVI and CIs private trust companies (PTCs), have also proven attractive to Asian clients hesitant about transferring substantial wealth and control of family businesses to third party trustees. However, PTCs can lose their appeal when clients understand the fiduciary duties and requisite standard of care imposed on PTCs, and the extra costs associated with a purpose trust or foundation holding the shares of the PTC. (4)

CFCs (5) offer another alternative, and are capable of existing indefinitely, are orphaned in nature, and can entrench their objects. They allow a greater amount of customisation, and since CFCs do not need to have members (6) whose interests may conflict with the wishes of the founder, they may be suitable for high-risk less diversified asset portfolios. However, the entrenchment of objects (7) may prove too rigid for CFCs to be an effective dynastic vehicle.

Family office services and products, such as family councils and charters, are also available and can assist Asian clients in consolidating existing structures in a single jurisdiction.

Footnotes:

1,      Although it should be noted that a BVI or CI’s will may not necessarily defeat forced succession laws where a deceased dies domiciled outside of the BVI or CI’s.
2,      BVI: Section 86 of the Trustee Act; CIs: Section 14 of the Trust Law.  It is worth noting that reserving too much power might lead to a challenge to the trust in another jurisdiction: JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch).
3,      Section 100 of the Trusts Law.
4,      For succession and tax purposes, it is recommended that the shares in PTCs be held in a standalone purpose trust or foundation.
5,      Recently introduced in the CIs by The Foundation Companies Law 2017.
6,      Section 8 of The Foundation Companies Law 2017 (The FC Law).
7,      Sections 9 and 10 of The FC Law.