BVI trusts: purpose trusts

Like a significant number of other offshore jurisdictions, the British Virgin Islands recognises trusts without identifiable beneficiaries which are established to carry out or further non-charitable purposes. The relevant legislation can be found in sections 84 and 84A of the Trustee Act; the former section applies to trusts created before 1 March 2004, and the latter applies to trusts created on or after that date. Purpose trusts can be governed by the VISTA regime (see our separate note onVISTA trusts for more information).

Post 1 March 2004 purpose trusts

The main features of section 84A are:

Conditions

In order for a non-charitable purpose trust to be valid the following conditions must be satisfied:

• The purpose(s) must be specific, reasonable and possible.
• The purpose(s) must not be immoral, contrary to public policy or unlawful.
• At least one trustee must be a "designated person" (a barrister/solicitor/certain accountants practising in the BVI, a licensee under the Banks and Trust Companies Act 1990 (usually a BVI trust company), or a BVI Private Trust Company (PTC) – see our separate note on PTCs for more information about them).
• The trust instrument appoints an "enforcer" and provides for the appointment of a substitute if there is no enforcer or no enforcer able or willing to act (charitable purpose trusts cannot have an enforcer as the Attorney General performs that function).
• The enforcer appointed by the trust instrument is a party to it or consents to acting as enforcer, in writing, to the designated person trustee.

The offices of enforcer and trustee cannot be held by the same person or entity concurrently.

Enforcer

The enforcer has “both the power and the duty” to enforce the trust, a function performed by the beneficiaries of traditional trust structures. To avoid the argument that a purpose trust without an enforcer will fail, the court has wide powers to appoint and replace enforcers and the legislation obliges the designated person trustee to inform the Attorney General “as soon as practicable” if the designated person trustee “has reason to believe that there is no enforcer...or no enforcer able and willing to act, and that no enforcer is likely in the immediate future to be appointed” (failure to do so may result in the designated person trustee being fined up to US$5,000). In such circumstances the Attorney General must apply to court within 90 days for another enforcer to be appointed.

The trustees must provide the enforcer with the following documents:

• The trust accounts
• Copies of the trust instrument and deeds and other written instruments executed pursuant to it
• Legal and other professional advice received by the trustees
• Any other documents the trust instrument requires the trustees to provide

Trustees

Where an enforcer or a non-designated person trustee “has reason to believe that no trustee of a purpose trust is a designated person or that no designated person is likely in the immediate future to be appointed as a trustee” then they are obliged to “use all reasonable endeavours to secure the appointment of a designated person as a trustee”. If those endeavours fail then the non-designated person trustee or enforcer (as the case may be) must apply to the court for a designated person trustee to be appointed.

This obligation is supported by further provisions which allow (but do not oblige) the settlor (unless the trust instrument provides otherwise), a current trustee, the enforcer, or the Attorney General to apply to court for a designated person trustee to be appointed if a purpose trust does not have one.

A designated person trustee must keep a documentary record of the following in the BVI:

• The terms of the trust
• The identity of the enforcer and any other trustees
• All settlements of property on the trust and the identity of the settlors
• The trust accounts
• All distributions or applications of trust property

Perpetuities

Purpose trusts are exempt from the rules against perpetuities (including the rule against perpetual trusts) and powers of excessive duration, although a purpose trust instrument may (but need not):

• Specify a date or event on which the trust will cease to be a purpose trust and set out how the trust assets will be disposed of on that date or event.
• Provide that while the trust is a purpose trust the trustees owe no duty to any persons who will become entitled to the trust assets, or to any purposes for which the trust assets are to be applied when the trust ceases to be a purpose trust.

Variations

The court has an unfettered power to vary the purposes of a purpose trust, enlarge or vary the trustees’ powers, or amend any other provisions of the trust. This power may be exercised following an application from the settlor (unless the trust instrument provides otherwise), a trustee, the enforcer, or anyone else nominated by the trust instrument. Before ordering a variation the court has discretion to consider such factors as it thinks material, which the legislation suggests may include changes in circumstances which make executing the trust according to its terms impossible or impracticable, unlawful or contrary to public policy, or obsolete in that the intentions of the settlor and the spirit of the gift are no longer achieved.

Scope

Section 84A does not affect the law relating to charitable trusts and will not invalidate a trust which would otherwise be valid. Unlike its predecessor, section 84A does not expressly prevent trusts “for the benefit of particular persons...or...some aggregate of persons ascertained by reference to some personal relationship” from being purpose trusts. Consequently, one analysis of the legislation is that BVI trusts may now be created for the benefit of individuals who have no right to enforce the trust.

Uses for purpose trusts

Purpose trusts are frequently used:

• To hold shares in PTCs. This avoids the need to obtain a Grant of Representation in the BVI (a costly and time consuming exercise, especially if the deceased did not leave a BVI will), which would be necessary on the death of an individual who owns PTC shares. Secondly, if the purpose trust is established within the VISTA regime the settlor can control the appointment, removal and remuneration of the PTC’s directors through what are known as Office of Director Rules (see our separate note on VISTA trusts for more information).
• To further purposes which, although generally accepted as philanthropic, are not charitable in the eyes of the law (for example, promoting a political agenda).
• To hold shares in special purpose vehicles as part of what are commonly referred to as "orphan structures", so called because the assets are held for a purpose (such as conducting an off balance sheet transaction) rather than a beneficiary/beneficiaries and thus become "orphaned".
• To isolate assets which form part of a larger transaction.