The importance of proper succession planning
By Tony Pursall and Richard Grasby, Maples and Calder – The British Virgin Islands (BVI) is a leading jurisdiction for company incorporations. The latest figures from the territory show that there are approximately 500,000 active BVI business companies and the rate of new incorporations shows no signs of abating. Many of those companies have individual shareholders, often a single individual. And many of those individuals have done little or no planning to deal with succession in the event of their death or, as we shall see, the planning they have done may not be effective.
This article outlines the rules governing succession to shares in a BVI business company on death, explains why many of the actions taken to deal with the issue may not work and suggests possible solutions, including the use of VISTA trusts which are becoming an increasingly popular planning tool in these circumstances.
The BVI Succession Rules
The first issue is the location (or "situs") of the shares. Where the shares are held directly by the individual shareholder, this is straightforward ñ it is the BVI as clarified by statute. The common law position is less clear as there is English case law suggesting that shares may be located where they can be dealt with, so the location of the register of members normally determines the situs of registered shares.
If the shares are held by a nominee, the beneficial owner does not own shares in a BVI company but rather the rights under that nominee agreement or declaration of trust. The location of those rights will depend on the effect of the nomineeship under its proper law. If the proper law is BVI, the arrangement will normally be a bare trust under which the beneficiary has an equitable interest in the shares and, as such, it is deemed to be located where the shares are located, i.e. the BVI. If the proper law is not the BVI (or it is not clear) further consideration will need to be given to this issue and appropriate advice taken.
Where the shares or the beneficial interest in them are located in the territory, the BVI courts will have jurisdiction to determine succession to those assets and the BVI law will, following English common law principles, apply the law of the deceased's domicile in determining entitlement to assets. Domicile is a common law concept meaning the place which a person regards as his or her permanent home and with which he or she has the closest ties. It is distinct from residence and nationality and is not always straightforward to determine, particularly for individuals from civil law backgrounds who are unfamiliar with it. Once domicile has been determined, advice will need to be taken on the relevant law in that jurisdiction.
The only persons entitled to deal with the BVI assets of a deceased individual are those persons named in a grant of representation, which covers both a grant of probate and a grant of letters of administration. The grant, once issued, becomes a public document. As it includes a copy of the deceasedís will that too will become public.
In order to obtain a grant, a formal application by the executors (or an attorney on their behalf) is made to the BVI court. The supporting documents include an affidavit of foreign law by a lawyer qualified and practising in the country of the deceased's domicile as to the validity of the will and the right of the executors to be appointed. This process can often take several months. The BVI court itself is fairly efficient and will normally process an application within six to eight weeks, but assembling the supporting documents can often take considerable time, particularly where different systems of law are involved and translations are required.
During that time, the shares are effectively paralysed as no one can vote them, transfer them or sell them, nor can anyone give a receipt for any dividends. It is also common for an individual to be sole shareholder and sole director. In that case, there is no director able to authorise the register of members to be updated, nor is there any registered shareholder capable of passing a shareholder's resolution to appoint a new director. Uniquely though, the BVI has the concept of a reserve director who can be nominated in those circumstances to become a director on the death of a deceased sole director/shareholder and it is often worth considering nominating someone to act in those circumstances.
Planning which does not work
For the reasons set out above, it is not uncommon for shareholders to want to bypass the probate procedure. Three methods which do not work and potentially expose the directors to personal liability are the use of an undated share transfer, a power of attorney and a nominee. In each case, a trusted advisor is given instructions to effect the transfers after death.They all fail for the same reason, i.e. that, on death, any authority of the trusted adviser ceases and the documents executed by the mare invalid. Using an individual nominee creates the additional risk that the nominee may die before the shareholder (or become incapacitated) so that the nominee will not be able to execute any documents and there will need to be an additional legal process to transfer the shares from the deceased nominee.
The only safe course of action for directors is to insist on sight of a BVI grant. There are clear risks if they instruct the registered agent to update the register of members without doing so, particularly if they have knowingly relied on one of the above methods. They may be personally liable for any loss if the true personal representatives named in a grant subsequently demand the transfers of the shares or if the effect of the transfer they approved is to evade the testatorís creditors. Another risk is that they may be deemed to be executors "de son tort;" by deliberately dealing with the property of a deceased person without the authority of the court, they may have accepted the responsibility of an executor. If the effect of the transfer is to evade estate tax (or its equivalent) in the deceased's home jurisdiction, there may be a risk of their being subject criminal to sanctions for breach of the anti-money laundering rules for assisting that evasion.
Does a BVI will provide an effective solution? The answer is that it only works if it is effective under the law of the deceased's domicile. It must therefore be valid under that law - in terms of the capacity of the testator, its form (e.g. does it need to be witnessed, notarised or registered?) and its substance (e.g. if the law ofthe deceased's domicile applies Shari'a law or some other form of forced heirship then the will must comply with those forced heirship rules). If it is not valid under that law, it will not be valid under BVI law even if it would be a perfectly valid will for someone domiciled in the BVI to make. It is therefore essential to ascertain the testatorís domicile and take appropriate legal advice in that jurisdiction. The situation must be kept under review in case the testators circumstances or the law changes.
Where a will may not be effective, a simple solution which works for some clients is for the shares to be held as joint tenants with rights of survivorship. On the death of the first joint owner to die, the survivor becomes absolutely entitled to the shares. While there are no reported BVI cases on this point, it is thought that joint tenancies are effective as a matter of BVI law, in that the deceased's joint owner's interest does not form part of their estate for succession purposes, so the deceasedís domicile is not relevant. The main drawbacks are that any planning is necessarily limited and the joint owners have immediate rights in the shares rather than rights which arise only on death.
Under BVI law, a trust of the shares in the BVI company can be established which gives the settlor effective control. He or she can retain rights to revoke or amend the trust, to receive dividends and to direct the trustee in relation to the investment of the company's assets. While those types of reserved powers trusts are now relatively common in a number of other jurisdictions, they leave the trustee with certain residual duties to the beneficiaries which the settlor would typically prefer them not to have.
In the BVI, those duties can be excluded if the trust is made subject to the Virgin Islands Special Trusts Act, 2004 (VISTA). VISTA expressly allows those duties to be modified or excluded entirely and is particularly well suited to this type of trust where the settlor wishes to continue to have control and to benefit from the shares during his lifetime but wishes to avoid probate on his death. Where appropriate, it also allows the settlor to put in place longer term estate plans by providing for the shares to remain in trust after his death rather than being distributed outright at that point to his named beneficiaries. A trust has the added advantage that it can also deal with what should happen if the settlor becomes incapacitated during his lifetime which can equally paralyse the shares and create delay while the relevant court proceedings take place.
The principal downside is that there will be ongoing trustee fees but professional trustees in the BVI tend to be competitive in the international trust market and, in most cases, are even more competitive for these types of reserved powers VISTA trusts because they have less responsibility.
Any individual who owns shares in a BVI company would be well advised to consider what will happen to those shares on his or her death and to take appropriate legal advice to ensure that his or her wishes are carried out. As with other common law jurisdictions, delays may be caused by probate procedures and a BVI will may not always be effective. Certain other methods used to bypass probate are unlikely to work.
The good news is that there are effective succession planning techniques which can be used and that the BVI has unique legislation which can make effective succession planning easier and cheaper, including the use of reserve directors and VISTA Trusts.
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