BVI Introduces New Reserved Power Trust Legislation

Published date07 July 2022
Subject MatterCorporate/Commercial Law, Wealth Management, Corporate and Company Law, Offshore Financial Centres, Trusts
Law FirmO'Neal Webster
AuthorMr Christopher McKenzie

Background'why reserved power legislation has been enacted

Many prospective settlors, especially those from jurisdictions or family backgrounds in which trusts do not feature,1 the establishment of a lifetime trust can involve a rather significant leap in the dark. This is so, because, once such a trust has been established, the settlor would have no control over its administration - that is, unless the trust instrument expressly reserves rights to him or her. These concerns of settlors about relinquishing ownership and control will indeed be particularly prevalent in the case of a trust which is established as a discretionary trust and where especially wide powers are conferred on their trustees.2

The administrative powers of BVI trustees are usually similarly extensive: unless the trust is established as a VISTA trust3 they would in most cases have the power to sell the assets which the settlor has transferred to them on establishing the trust and to reinvest the proceeds in other assets of their selection.

If the relevant principles of English law are applicable to a trust, it is thought that a settlor may reserve substantial powers to him or herself,4 but some commentators have suggested that there is, and indeed there clearly must be, a limit, but there is some uncertainty about where precisely the line should be drawn given that there is very little satisfactory case law directly on this point. In North America, however, trust law has developed rather differently and there it seems that the settlor can, during his or her lifetime, have more extensive dominion without creating only a bare trust which arises as a matter of English law when powers and rights of such substance have been reserved to the settlor that it cannot be said that he or she has parted with any beneficial interest in the relevant property.5

If the relevant principles of English law are applicable to a trust, it is thought that a settlor may reserve substantial powers to him or herself, but some commentators have suggested that there is, and indeed there clearly must be, a limit, but there is some uncertainty about where precisely the line should be drawn given that there is very little satisfactory case law directly on this point.

As a consequence of the issues highlighted above and in view of the increasing desire for modernisation which satisfies the legitimate expectations of prospective settlors - as well as a need to introduce an element of certainty for settlors who wish to set up trusts in jurisdictions such as the BVI in which the relevant principles of English law would otherwise apply - numerous international financial centres, commencing with the BVI, have introduced reserved power trust legislation. They have done this with the dual objective of providing the requisite certainty and of meeting settlors' wholly legitimate needs and expectations.

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