Trusts Demystified - Part IV: Where to settle a trust if you're from the U.S. or from abroad

In this Part IV, we focus on a major offshore trust stack, the so-called VISTA trust in the British Virgin Islands.

Similar to Wyoming and some of the other US trust locations, the BVI VISTA trust offers a way for the settlor of a trust to also be the owner of the trustee, allowing you full control over the assets held in trust.

However, the VISTA trust also has some restrictions and in our conclusion, we share some of the inside on why, even if you are not a US resident, a US trust may be a better option for you than an offshore trust.

Hasta la VISTA

The British Virgin Islands (BVI) VISTA Trust—short for Virgin Islands Special Trusts Act—is a unique trust structure primarily designed for holding shares in private companies, with an emphasis on preserving and growing business assets.

Created by the Virgin Islands Special Trusts Act of 2003 (amended in 2013), it provides a solution for settlors who wish to separate beneficial ownership from day-to-day management of a company, making it a popular choice for wealthy individuals, business owners, and family offices.

A VISTA trust is structured to allow trustees to hold shares in BVI companies without interference in the operational management, which is often handled by company directors.

This structure contrasts with traditional trusts, where trustees generally have a fiduciary duty to intervene in business decisions if they believe it's in the beneficiaries' best interests.

The VISTA trust has the following key characteristics:

1. Non-interventionist: Trustees are not required to intervene in the management of the trust’s underlying company.
2. Reserved Powers: The settlor can reserve certain powers, providing them flexibility over company management.
3. Preservation of Family Businesses: Often used to hold family businesses where the settlor wishes to retain management within the family or designated directors.

Let's now have a closer look at the benefits of a VISTA trust before we highlight some restrictions.

Everything under control?

1. Control over company operations

As mentioned above, one of the key benefits of the VISTA trust is how it takes the fiduciary relationship out of the Trustee's management of the company held in trust:

• Trustees have no obligation to intervene in the underlying company's management unless otherwise specified, allowing company directors to continue running the business independently.
• This non-interventionist approach is advantageous for active businesses or family-owned companies where management continuity is essential.

2. Settlors can configure Trustee obligations

Settlors can define specific situations in which the trustee must act, such as in cases of director misconduct or financial instability.

This flexibility allows settlors to tailor the trust to fit family or business dynamics while still providing a protective framework.

3. Asset Protection

• Like other trust structures, VISTA trusts provide strong asset protection, safeguarding assets from potential creditors, litigation, or divorce proceedings.
• Because the trustee does not actively manage the company, beneficiaries can have greater confidence that the trust assets remain protected under BVI law.

4. Succession Planning

• VISTA trusts are suitable for long-term succession planning, as they provide a clear framework for transferring business ownership across generations.
• The trust structure enables family members to inherit a business without direct involvement in day-to-day operations, thus preserving family wealth and legacy.

5. Minimized Trustee Liability

• Trustees under VISTA have limited liability for company management outcomes, as they are generally not involved in daily operations.
• This reduced liability appeals to professional trustees who might otherwise avoid acting as trustees for operating companies due to the risks involved.

6. Tax Neutrality

• BVI does not impose estate, income, capital gains, inheritance, or corporate taxes on VISTA trusts, making them attractive for tax planning purposes.
• However, it’s important to consult local tax advisors regarding potential tax implications for settlors or beneficiaries residing outside the BVI.

From the above it is clear that the VISTA trust, despite the typical assets protections it provides from it being a trust and the tax neutrality form it being an offshore trust, was intentionally designed to cater to close-held i.e. family- or founder-owned operational businesses who want retain full ownership of their business but largely delegate management to hired-in professionals.

What gives?

1. BVI Companies Only

Perhaps the major downside to a VISTA trust is that it can only hold shares in a BVI Business Company (BVI BC), limiting its application if the settlor’s assets include non-BVI companies.

Such BVI BC can of course in turn hold shares in non-BVI companies, but thjose would then all be subsidiaries of the operating company, which may not be desirable if the assets are totally unrelated.

This means other types of assets or non-BVI company shares would require a separate trust or a parallel structure.

2. Limited Trustee Powers

• Trustees’ hands-off approach can be a limitation if more direct oversight becomes necessary, as the trustee’s ability to step in is typically restricted unless a specific issue, like a trigger event, is identified in the trust deed.
• This non-intervention approach could pose risks in situations where active governance may have been beneficial to beneficiaries.

3. Inflexibility for Non-Business Purposes

• VISTA trusts are purpose-built for holding shares in active businesses, so they are not ideal for trusts focused on passive investments, diverse portfolios, or family funds without operational companies.
• Traditional BVI or US trusts, or other offshore structures are often better suited for passive investment or diversified asset management.

4. Trustee Selection and Requirements

• Before May 2013, the trustee to a VISTA trust had to be a licensed trust company in the BVI, which adds significantly to the costs and the administrative and regulatory compliance requirements of the trust.
• Since May 2013, BVI Private Trust Companies (PTCs) have been able to act as the sole trustee or one of the trustees of VISTA trusts, similar the e.g. a Wyoming PTC to a Wyoming trust.

5. Potential Tax Implications for Non-BVI Residents

• Although BVI does not impose direct taxes, beneficiaries and settlors outside of BVI may have tax and reporting implications in their home jurisdictions, depending on local laws regarding foreign trusts.
• Some tax authorities may classify the VISTA trust as a grantor trust, which can lead to tax liabilities for the settlor and/or beneficiaries.
• As a general rule for US tax residents, even if some of the offshore tax advantages can be maintained when assets are passively held, distributions will be taxable and the very burdensome reporting requirements alone may discourage US settlors of BVI trusts.

How to settle a VISTA trust

VISTA trusts are broadly settled in the same way as US trusts, however particular care needs to be taken in delineating the powers of the settlor, trustee (if not controlled by the settlor) and the directors:

1. Settlor’s Intent and Purpose: The trust deed should clearly outline the settlor's wishes for business operations, succession plans, and the trustee’s limited role in management.
2. Directorship and Trustee Roles:
   • Company directors retain management control, while the trustee's role is more administrative and focused on holding shares.
   • The trust deed can specify circumstances (such as defined “intervention triggers”) under which the trustee should take action.
3. Reserved Powers: The settlor may retain certain powers, such as the ability to appoint or remove directors, which provides continuity without trustee interference.

Typical use cases

The VISTA trust is used for three main use cases which can overlap:

1. Family Business Succession: This is perhaps the most common use case of a VISTA trust, when a family-owned business owner transfers shares of a BVI holding company of the operational business units into the trust, appoints family members or trusted individuals as directors, and protects the business for future generations without active trustee involvement.
2. International Asset Protection: For individuals seeking to protect a business from creditors or litigants, a VISTA trust holds business assets offshore while preserving control for designated managers.
3. Investment Holding Structure: Entrepreneurs can establish a VISTA trust to hold their shares in the company they founded, allowing directors to make strategic business decisions without trustee interference while ensuring the business is safeguarded.

The ins and outs

Let's start with the outs

VISTA trusts has definitely added to the BVI's arsenal of attractive structures and are better suited for family- and founder-owned businesses compared to a traditional discretionary trust.

In the case of the VISTA trust, in addition to the lower setup and maintenance costs compared to a traditional BVI (or other offshore) discretionary trust, by isolating trust assets within a BVI company and relying on directors for management, the VISTA setup allows settlors to retain control and continuity of business operations.

However, the VISTA trust's limitations—including the BVI company requirement and the onerous reporting requirements especially for US-based settlors —means they are best suited for specific scenarios, particularly those involving active businesses rather than passive investments.

The ins: The US may be the world's biggest offshore

Before we conclude, here's our more touchy feely take which offshore service providers - especially local ones who will have an inevitable home bias - won't tell you: offshore is no longer what it used to be, for the following reasons:

1. For non-US tax residents, if you thought you could still remain anonymous (for all the right reasons which do not include tax evasion!) as the settlor of a trust in BVI or in any other offshore jurisdiction, such anonymity is gone:
   1. Trusts can still be settled privately as they are as we have seen essentially a confidential arrangement between the settlor and the trustee, however if such trustee is a licensed service provider, KYC will be invasive and even if the trustee is your own Private Trust Company, that company has to be formed in BVI which means Otonomos or any other service provider is obligated to gather your personal information.
   2. Establishing a purpose trust to own the PTC will not change the above as KYC including personal information on the settlor will be performed on the PTC as trustee to the Purpose Trust.
   3. Though such personal information is not filed, it is held on file and Ultimate Beneficial Owner (UBO) information has to be entered into a Government-hosted and managed database. While access by third-parties is subject to due process, it is safe to assume that not only BVI authorities have access top this database and data is likely shared.
2. For both US and non-US tax residents, the bigger reason why offshore is no longer what it was is that international obligations related to the automatic sharing of banking information will result in the exchange of banking-related information, including account holder names and their UBOs, with our home country tax authorities. In short, fiat will dox you, and so will crypto if you use licensed centralized exchanges.
3. US tax residents receive special treatment - America is special after all :-). FOr them, onerous reporting requirements will kick in when they settle a trust offshore and transfer assets into the trust, primarily in the form of IRS Form 3520 and the ongoing 3520-A filing. This may in and of itself discourage US tax residents from settling a trust offshore as if reported, it largely robs the structure of the offshore tax neutrality and may net-net even make the tax worse for US-based settlors and beneficiaries.
4. Banking will be nigh impossible for non-US controlled trusts whose PTC, by virtue of being a BVI entity, will find few international banks who will open an account for the Trustee, except - perhaps ironically - US banks who do open accounts for offshore entities generally. In light of the US not participating in the automatic exchange of information, many non-US controllers of offshore trusts will actively seek US bankings as their financial information is not automatically shared with the tax authorities of their home countries - one of the major reasons why the US remains and perhaps ever more became a sink for non-US banking and may now be the world's biggest offshore jurisdiction.
5. For US-controlled offshore trusts, access to banking and regulated financial services outside of the US (the infamous Swiss bank account of yore) will be entirely cut-off since the obligations and possible penalties on non-US financial institutions when opening accounts for US-related entities and trusts is now such that banks just won't touch them.
6. In combination with the heavy reporting duties and the negation of many of the tax benefits from going offshore, the equation arguably does no solve for US-based controllers of trusts settled outside the US or even for non-US controlled trusts in which the beneficiaries as US-based but the settlor is not.
7. For non-US settlors of offshore trusts, the possibility to bank in the US for their offshore PTC and entities remains attractive for a number of reasons, including the non-participation by US banks and financial institutions in the automatic exchange of information. However the same advantage can be secured by settling a trust in the US which, as we have seen in earlier Parts, by virtue of such US trusts being considered "foreign" in the eyes of the IRS, the tax advantages of keeping a trust in a traditional offshore are largely eroded but the stigma of having a trust in a "fiscal paradise" remains.

CONCLUSION

At Otonomos, we approach each client's use case as an equation. Once all variables are know, the equation solves for a recommended legal stack.

In the case of trusts, as a broad generalization, trusts with US tax-resident settlors and/or beneficiaries may as well save themselves the trouble and the expense and choose one of the US leading trust states, of which Wyoming remains our favorite but South Dakota and Nevada too are candidates.

For non-US settlors of trusts, offshore trust jurisdictions, especially the BVI as it too allows for a settlor-controlled trustee PTC, is still an option especially if it can be combined with US banking. However all offshores now conduct quite intrusive KYC so they should have few illusions about how shielded their setup is.

In that respect, the US on the whole offers better privacy and non-US settlors of US trusts in places such as Wyoming with non-US beneficiaries will not be on the IRS radar, as they are considered "foreign" trusts for tax purposes, even when banking in the US and holding US assets (with very few exceptions).

So on balance, the US may be the winner.

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