An Offshore Perspective: Reservation Of Powers In BVI Trusts

• Published date: 31 May 2023
• Subject Matter: Corporate/Commercial Law, Wealth Management, Litigation, Mediation & Arbitration, Wealth & Asset Management, Arbitration & Dispute Resolution, Trusts
• Law Firm: Collas Crill
• Author: David Harby and Fay O'Halloran

What is a 'trust', how are they established and, more importantly, how are they controlled? This article explores how the BVI Trustee Act 1961 and the Trustee (Amendment) Act 2021 strengthen the British Virgin Islands' (the BVI) trust law by reserving powers for the settlor of a trust and providing an attractive, flexible jurisdiction for trust formation.

An introduction to trusts and the concept of reserving powers

A 'trust' is a legal relationship which is created by a person (known as a settlor) for the benefit of a person or charity (known as beneficiaries), or for a particular purpose. A trust can be created in life or on death and involves the trust assets being controlled by another person (known as a trustee). Trust instruments can also appoint a protector, who may have other powers including authorising trustees to exercise their powers. Trusts are often a popular choice to allow individuals to divest their ownership and control of assets for various reasons, including for tax or succession planning purposes.

The BVI is an established international financial centre which sees a significant amount of trust creation and resulting litigation. In the BVI, the general principles of trust law derive from English common law. This is supported by statute, including the BVI Trustee Act 1961 and the more recent Trustee (Amendment) Act 2021.

Traditionally, the creation of a trust would involve a settlor relinquishing their power over the trust assets and when a trust is established, it is usual for the settlor to transfer the legal title to their assets to a trustee, to be held for the benefit of the beneficiaries or for a particular purpose. However, this concept has not always been viewed favourably by settlors and there has been a movement towards settlors seeking to retain control of the trust assets. This is a global issue which has been considered by Courts in different jurisdictions and, by way of illustration, two examples of recent case law on this topic are briefly considered below.

Reservation of powers in the BVI

A settlor would often prefer to retain control over their assets and the BVI was the first offshore jurisdiction to introduce reservation of powers legislation, which affords settlors this flexibility. In support of this approach, Article 2 of the Hague Trusts Convention clarifies that "the reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily...