What happens when the shareholder of a PIC dies and how to plan for it
Fraser Allister, Andrew Miller, and Daniel Altneu | Bedell Cristin
Many Brazilians have incorporated companies in the British Virgin Islands or the Cayman Islands in order to hold US real estate or to make their international investments. These companies are sometimes known as "personal investment companies" or "PICs".
PICs have been tremendously successful because they are relatively low-cost and easy to operate, because they are subject to light-touch regulation and reporting, and because they are tax efficient. As the population ages, it's very important to understand what happens when a shareholder of a PIC dies and what planning can be done.
Shares in PICs are located in BVI (where it's a BVI company) or Cayman (where it's a Cayman company), regardless of where the share register is kept. This means that, when a shareholder dies, his or her shares can only be transferred in accordance with the local BVI or Cayman legal process.
This process is different in BVI and Cayman compared to Brazil. In BVI and Cayman, the local court will appoint a personal representative (also known as an executor or administrator) who is responsible for administering the local estate; the court does not make an order naming beneficiaries and distributing the estate. The personal representative can be an heir of the deceased or a beneficiary of the estate but he or she does not need to be.
The personal representative is legally responsible for identifying all of the deceased's assets in BVI or Cayman (usually just the PIC shares). He or she must then apply to court for a grant of probate (if there is a will) or a grant of letters of administration (if there is no will) and then transfer the shares to the beneficiaries of the estate.
Although it is a court process, where there is no dispute among the family, the application will usually be heard "on the papers" which means that a lawyer prepares a number of documents, including affidavit evidence about the deceased, his or her family, and the BVI or Cayman assets, and a judge considers the application without the need for anyone to appear in person. It is not something to be feared but it will take a number of months to complete and it does come with a cost in terms of court dues and legal fees.
The court process must be completed in any case where a person dies personally holding a share in his or her sole name, regardless of whether or not he or she has left a valid will.
There are a number of ways to plan for the death of a shareholder of a PIC and each has advantages and disadvantages.
A trust is an arrangement where ownership of the shares is given to a trustee to hold according to terms that the settlor decides. This is typically a more complex solution and it involves ceding some control over the PIC, although the VISTA trust in BVI, in particular, allows the settlor to retain a lot of control over the management of the PIC's investments. BVI and Cayman law also have features, such as "reserved powers" trusts, that allow the settlor to retain some control over trusts but care needs to be taken. Trusts are more sophisticated and can be more expensive to establish and run than some of the other planning options but, because the shares are owned by the trust, there is no need for a local grant on the settlor's death.
Another option is to hold shares as "joint tenants". This means that shares are held by two or more people jointly and, on the death of one shareholder, the shares automatically vest in the surviving holder or holders without the need for a local grant of probate or letters of administration. While that can seem appealing due to its simplicity (and it can be an effective way for a married couple to hold shares), it does not work well where the joint shareholders are parents and children or where they are siblings.
Most commonly, shareholders of PICs will put in place a BVI or a Cayman will to govern the succession to the shares. The advantages are that the shareholder can chose the person or persons who will act as personal representative and, to the extent permitted by Brazilian law, he or she can also choose the beneficiaries of the BVI or Cayman estate. The cost of writing a BVI or a Cayman will is relatively modest and it gives the shareholder more certainty over what happens on his or her death, as well as simplifying the local court process.
Since the enactment of the Foundation Companies Act (2017), Cayman has also had the option of structuring the PIC as a foundation company, which is a type of company that can have beneficiaries rather than shareholders. This then avoids then possibility of having to apply for a grant on the death of one of the beneficiaries. Given that this can be a lower cost alternative to a trust, this option is likely to become increasingly popular.
As well as thinking about what happens on the death of a shareholder, it's also important to think about the management of the PIC and its investments. If the sole shareholder is also the only director, the PIC's affairs can be frozen until the local grant is made. In BVI, PICs can appoint a "reserve director" who automatically assumes office on the death of the shareholder / director.
Bedell Cristin
Fraser Allister, Managing Associate
fraser.allister@bedellcristin.com
Andrew Miller, Partner
andrew.miller@bedellcristin.com
Daniel Altneu, Managing Associate
daniel.altneu@bedellcristin.com
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