Improving Succession Planning for Middle Eastern Families: Beyond the Offshore Company

4 Oct 2023

In the realm of global asset holding, Middle Eastern families have long relied on the companies of jurisdictions like the British Virgin Islands (BVI) and Cayman Islands for their flexibility, cost-effectiveness, and quick implementation.

Companies from these jurisdictions have proven to be versatile vehicles capable of holding various assets. However, many families and their advisers overlook a critical aspect—the shares of these companies forming part of the deceased owner’s estate.

Consequently, this oversight can lead to lengthy, complex, and costly probate processes in several of these jurisdictions, causing financial stress and restricted access to assets for the heirs. In this article, due to their prolific use, we refer to the BVI company as an example, and explore the potential consequences of a prolonged probate process, proposing alternative options that can help to mitigate these risks.

The pitfalls of BVI Wills

A common misconception among Middle Eastern families is that establishing a BVI Will for the shares of their BVI company can bypass probate. However, in reality, if a person leaves a valid will dealing with their BVI assets, that will still need to be admitted to probate in the BVI. In some cases, a non-BVI will (which deals with BVI assets) can be admitted to probate (or its equivalent) in a jurisdiction outside of BVI and then that foreign grant can be “resealed” in the BVI, to allow the personal representatives of the deceased to administer the estate in the BVI.

If no valid will exists, the process becomes more complex, requiring a different type of grant called a “Grant of Letters of Administration.” Both these processes take several months to complete and necessitate BVI legal representation, leading to significant delays and expenses.

A further problem arises when using a will to deal with BVI assets, because BVI law does not allow a person to use a will to avoid any “forced heirship” rules, which might apply to them outside of BVI, for example under Sharia law which forms the basis of many legal systems in the Middle East. This is an under-appreciated issue and one which has the potential to cause significant problems. If a person with BVI assets (including shares in a BVI company) wants to avoid forced heirship rules on their BVI assets, a will is unlikely to be the appropriate solution. This issue is not unique to BVI and arises in a number of other jurisdictions (including the Cayman Islands).

Inadequate alternatives

As a result of the above problem with BVI Wills, Middle Eastern families seeking to bypass forced heirship rules often consider various options like “will-like trusts,” shareholders’ agreements, or joint tenancy arrangements for their BVI shares. However, these options ultimately fall short of being comprehensive succession plans and in some cases the arrangements may not work as intended. They often result in frustrated heirs engaging in lengthy and remote legal processes, dependent on the speed of BVI courts, which can be a significant cause of concern.

Frozen assets and financial stress

One of the major consequences of a lengthy probate process is that banks might be compelled to freeze assets or otherwise restrict access until probate is complete due to the lack of an identifiable beneficial owner. Consequently, heirs are left without the right of access to their inherited assets, exposing them to financial stress and potential losses in fluctuating markets. Inability to trade or sell the assets further exacerbates the situation, making it imperative for families to seek alternative succession planning solutions.

Guiding clients towards better solutions

David Cooney, Group Partner in Walkers’ Guernsey Private Capital & Trusts team, lived and practiced in the Caribbean for several years and continues to advise on matters of BVI law. He is well used to advising clients who are grappling with such challenges. David usually recommends that clients consider the following options, listed in order of effectiveness, as suitable alternatives for clients managing their BVI assets:

  • Lifetime Discretionary Trust: a lifetime discretionary trust, is often the most effective solution in this scenario and offers flexibility and robust asset protection, if properly established. Contrary to popular belief, trust deeds can be drafted simply and at a low cost while limiting the powers and administrative requirements of the trustee. This approach allows the client, or their trusted financial advisor, to retain control over asset direction and is a tried and tested solution to the BVI probate problem. Retained control and asset protection do have to be balanced against each other but we can help clients to achieve an appropriate balance for their circumstances.
  • Resealing a Qualifying Foreign Grant: Where applicable, explore the possibility of resealing a qualifying foreign grant in the BVI. Resealing a foreign grant in the BVI is generally a more straight-forward process than obtaining a BVI Grant. This can potentially simplify the process in the BVI and reduce the time and costs involved.
  • BVI Grant of Probate: If a valid BVI Will covers the BVI assets, obtaining a BVI grant of probate is a viable option. While it remains a formal process, and can be a time-consuming one, it is generally quicker and easier to obtain a BVI grant of probate of a BVI Will than it is to (i) obtain a BVI Grant of Letters of Administration where there is no valid will covering the BVI assets; or (ii) to obtain a BVI grant of probate in respect of a non-BVI Will.
  • BVI Grant of Letters of Administration: In cases where no valid will covers the BVI assets, a BVI grant of Letters of Administration becomes the default position. Although this option is available, it tends to be more time-consuming and complex than the previous options mentioned.

As advisors to high-net-worth individuals and families, it is our duty to guide our clients toward the most appropriate solutions for their unique circumstances. By understanding the implications of relying solely on BVI companies and recognising the limitations of other options, we can future proof our clients’ interests. And whilst the days of the trust as a one-size-fits-all solution in every jurisdiction may be a distant memory, this highlights that under certain conditions it still nobly serves as a fitting and robust instrument for wealth planning and, ultimately, for ensuring our clients’ peace of mind.