Flexible Succession Planning for MENA Families Using Cayman and BVI trusts
Raymond Davern, Dennis Ryan and David Pytches
Conyers Dill & Pearman
Raymond Davern, Dennis Ryan and David Pytches look at the ways in which the various types of trust products in each jurisdiction may be of interest to MENA families as succession planning vehicles.
Much of the wealth in the MENA region is held directly in the hands of private individuals or through closely-held companies. Recent articles suggest that more than 80% of businesses in the Middle East are family-run or family-owned, with an estimated US$1 trillion expected to be handed down to the next generation within the next five to 10 years, and with family businesses controlling over 90% of commercial activity in the region.
With such a high concentration of wealth in the hands of individuals, succession planning is one of the most pressing concerns facing Middle Eastern families today. Failure to put appropriate plans in place can result in unanticipated upheavals, family disharmony, significant delay and expense and, ultimately, fragmentation of family wealth. Trusts are playing an increasingly important role in addressing these problems.
The British Virgin Islands (BVI) and the Cayman Islands are natural choices for Middle Eastern families to establish a trust and, in recent years, they have begun to prove popular choices as well. This is, no doubt, in significant part because each of these British Overseas Territories offers a politically stable, tax neutral jurisdiction with a mature common law system, modern trust legislation and a large community of highly experienced trust practitioners who can establish and maintain all kinds of trust structures, from the simple to the sophisticated, and in conjunction with onshore advisors as may be needed. It is, however, also surely in very large part because of the very flexible, yet robust, trust product which each jurisdiction offers.
Inheritance laws and heirship rights
Over much of the MENA region, Shariah laws of inheritance determine the devolution of property on the death of an individual and dictate the shares and order of precedence in which family members will inherit.
In many common law countries however, freedom of testamentary disposition is the general rule and, as a result, there is in those jurisdictions no prohibition on lifetime transfers of wealth, including transfers into trust, to or for the benefit of persons other than those who would succeed to that wealth (or the shares or order of priority in which they would do so) under the default rules of inheritance which apply to property undisposed of at death where no valid will has been made by the deceased.
Both the BVI and the Cayman Islands, unlike many other common law countries, apply the rule of freedom of testamentary disposition unmodified in any way. More significantly for MENA families, both jurisdictions have determined to apply the rule to foreign nationals as well as their own citizens and residents by enacting robust ‘firewall’ laws which provide that, absent express provision to the contrary in a trust deed, no lifetime transfer of property into a trust may be set aside by the BVI or Cayman courts on the grounds that the transfer defeats heirship rights – or rights conferred on a person by reason of a personal relationship, including marriage or former marriage – arising under a foreign law.
Further, the laws of both jurisdictions provide that no transfer of property into trust is liable to be set aside on grounds that the laws of a foreign jurisdiction do not recognise the concept of a trust. All questions concerning the capacity of the settlor to create the trust, the validity of the trust and the powers created under it, and the administration of the trust are to be determined under the governing
law of the trust to the exclusion of any foreign law. Importantly also, it is expressly provided that a judgment of a foreign court which is inconsistent with these principles will not be recognised in the Cayman or BVI courts.
Since, as is outlined in the next paragraph, a transfer into a Cayman or BVI trust may be structured so that any action to undo the transfer would in most cases have to be brought, either initially or by way of enforcement of a foreign judgment, in the BVI or Cayman courts, the effect of these firewall provisions is that what are known as ‘forced heirship’ laws may, if and to the extent desired by an individual who is subject to Shariah succession law, be modified or even circumvented entirely through the use of a trust established in one or other of those jurisdictions.
Clearly, it is prudent to ensure that, so far as possible, the wealth which is transferred into a Cayman or BVI trust is located in a jurisdiction other than that of the MENA domicile of the transferor and locating it in the jurisdiction selected for establishing the trust is the obvious – indeed best – solution. This can be done by transferring the wealth to a Cayman or BVI company in exchange for the shares in that company (such that the transfer is for full value and bankruptcy unimpeachable) and then placing the shares in trust. In that way, both the assets and situs (location where the trustee performs his duties of managing the trust) will be either Cayman or the BVI and, so long as the relevant foreign law respects the exchange of wealth for shares, then any attempt to undo the trust or recover the assets will require to be brought in the BVI or Cayman courts and will be defeated as a matter of BVI or Cayman law by the firewall provisions.
Shariah compliant trusts
Of course, many settlors in the MENA region will not wish to mitigate all aspects of Shariah when creating a trust. Commonly, the trust deed will be drafted to ensure that many of its terms, and particularly those governing the trustee’s choice of investments, follow the requirements of Shariah. Equally, the settlor may determine that the interests of their family will be served best by an arrangement which will facilitate the consolidation and conservation of wealth with management decisions reserved to suitably qualified individuals. The flexibility of a trust is particularly well-suited to address all these concerns.
Cayman STAR Trusts
A STAR trust can be a helpful vehicle in the context of family business succession. This type of trust, unique to Cayman, may be established for the benefit of persons or purposes or both. The settlor may settle a trust with the dual objects of owning and operating the family business they have built up and providing for future generations of their family. Through this structure, the settlor may identify and prepare successors and ensure that the business remains intact after their death. Income may be either ploughed back into the business or applied for the benefit of family members.
STAR has the advantages of perpetuity and confidentiality. There is no limit to the duration of a STAR trust which can be attractive to the settlor who wishes to create a ‘dynasty’ style trust. Under STAR, the settlor is also able to restrict the ability of beneficiaries to obtain information concerning the trust or to challenge the decisions of the trustee.
BVI business companies
The BVI business companies are used extensively as holding vehicles throughout the MENA region.
Commonly, the shares of the company will be registered in the name of an individual and this can lead to control and transmission problems on the death of the shareholder. Such problems may be avoided by settling the shares into a BVI trust during the shareholder’s lifetime. Typically the settlor would reserve a life interest under the trust which will allow them to receive the income from the shares for life.
The settlor would then make provision for the shares to be held in trust for whomsoever they wish to benefit upon their death. If the provisions of the Virgin Islands Special Trusts Act 2003 (VISTA) are applied to the trust, this would permit the settlor to retain control of or influence in the management of the company either directly as lifetime board member or through control of the process of appointments to the board. Quite apart from leaving the settlor in control of running the company business, this would also allow retention of direct or indirect control over the declaration of dividends which, as income in the trustee’s hands, would be distributable to the settlor alone. Additionally, applying VISTA to the trust allows the settlor to prevent a sale or other disposition of the shares, save with specified consents.
Private trust companies
The BVI and Cayman private trust companies (PTCs) are used widely by Middle Eastern settlors wishing to retain a higher degree of involvement in the affairs of the trust. Both jurisdictions permit the incorporation of PTCs with a ‘light touch’ approach towards regulation, enabling the entrepreneurial settlor to incorporate their own trust company to act as trustee of one or more related trusts. The settlor, together with other family members or trusted advisors, may sit on the board of the trust company and take an active role in the trustee’s decision making process. This is perceived as allowing for more flexible, dynamic (and, arguably, less risk averse) trusteeship.
Succession problems as regards ownership of the shares of a PTC may be avoided entirely by putting the shares into a purpose trust (the purpose being to promote and maintain the PTC) which may be established either as a Cayman STAR trust or a BVI VISTA purpose trust but, in either case, so as to impose an obligation on the trustee to ensure that appointments to the board of the PTC are effected in accordance with the wishes of the settlor or any other person or persons (or, indeed, according to any lawful formula).
In that way, the identity of persons who shall manage the PTC (and thus of those who will be taking the key decisions about administration of the underlying trust) may be settled for the entire duration of the trust without the disruption and possible alteration in balance of power that might occur upon the death of any individual in whose names any of the PTC’s shares were placed.
It is important to recognise that the first step for any individual considering setting up a trust is to seek proper tax advice from professional advisors in their country or countries of birth, residence and domicile. This is an essential step – there may be little point in proceeding if the purposes of the trust will be defeated by domestic tax laws.
However, assuming that the establishment of a BVI or Cayman trust is either tax advantageous or tax neutral, its attractions as a way in which MENA families may structure succession to wealth more flexibly than Shariah law may allow, are considerable.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information
Raymond Davern is the head of trusts and private clients, BVI while Dennis Ryan and David Pytches are associates at Conyers Dill & Pearman.
This article first appeared in Islamic Finance News (1 May 2012, Volume 9, Issue 17, Page 20 – 21). For more information, please visit www.islamicfinancenews.com.