Carlos de Serpa Pimentel of Appleby takes an in-depth look at the creation and administration of trusts in the Cayman Islands.
"The flexibility and confidentiality of the trusts regime in the Cayman Islands is underpinned by its well-respected legislation and judiciary, and is supported by the effect of the Confidential Relationships (Preservation) Law."
The Cayman Islands provide a strong, stable and highly reputable platform for the creation and administration of trusts. As a British Overseas Territory the Cayman Islands offer a sophisticated and well-developed range of international financial services with a wide range of leading and international law firms, accounting firms and trust service providers.
Cayman Islands trusts, which are subject to Cayman Islands law, are primarily influenced by the English common law which comprises decisions made by English courts which can be highly influential and which are applied by Cayman courts where appropriate. Not all English judicial decisions will be relevant in the Cayman Islands as there is also Cayman legislation which takes precedence. The Cayman Islands trust law legislation includes the Trusts Law (2011 Revision) and the Perpetuities Law (1999 Revision). The final source for Cayman Islands law comprises decisions of the Cayman Islands Courts, including the Grand Court, the Court of Appeal and the Privy Council.
When considering an appropriate jurisdiction to establish a trust, the presence of a sound legal system and independent judiciary are important factors. The Cayman Islands, with their English common law roots, a final right of appeal up to the Privy Council and sophisticated judges who sit in the Financial Services Division of the Grand Court which hears trust cases, are therefore a favourable jurisdiction for the establishment and administration of trusts.
Cayman Islands trusts may be established either unilaterally, by declaration of the trustee, or alternatively by means of a deed of settlement to which both the trustee and the settlor(s) are parties and can be created on a revocable or irrevocable basis.
Some of the trust structures offered in the Cayman Islands include: discretionary trusts, STAR trusts, exempted trusts and private trust companies.
Discretionary trusts are the most common trust vehicle used in the Cayman Islands. The trustee is usually given an absolute discretion as to how to manage and invest the trust estate and how much and to which beneficiaries distributions should be made. Under the Trusts Law there are a number of statutory limitations which can be imposed on the trustee’s discretionary powers and settlors are able to reserve to themselves, or to others, a range of different powers such as the ability to amend the trust, revoke the trust and powers to direct investments.
Exempted trusts benefit from an exemption undertaking which guarantees that the trust will pay no Cayman Islands taxes for a fixed period (usually 50 years). It should be noted that at the moment no Cayman Islands trustees, or companies for that matter, pay Cayman Islands taxes of any nature whether exempted or otherwise, and none are foreseeable at this time.
Private trust companies are another popular alternative for a settlor to retain some control over the affairs of one or more family related trusts. The Private Trust Companies Regulations (2008) provide the basis for the establishment of registered private trust companies which allow for a Cayman private trust company to act as trustee of one or more family trusts. These structures can be established quickly and efficiently, and are increasing in popularity and application. A private trust company may act as a trustee of a STAR trust as well as a discretionary trust. A registered private trust company must have its registered office with a fully licensed Cayman Islands trustee.
Since the introduction of the Perpetuities Law in the Cayman Islands in 1995, Cayman has replaced the English perpetuity rules of “life-in-being” with a fixed perpetuity period of 150 years, unless the trust is a private purpose trust (known as a STAR trust), in which case the trust may have an unlimited duration. A useful “wait and see” provision also forms part of the legislation.
First introduced in 1997, the Cayman Islands Trusts Law (2011 Revision) permits the creation of a novel type of non-charitable purpose trust, known as a special trust or “STAR trust”. A STAR trust may be created for any objects, purposes, persons or a combination of these, provided that they are lawful and not contrary to public policy.
STAR trusts are a creature of statute, created in response to a high demand for non-charitable purpose trusts which were otherwise not permitted under the existing English law-derived framework. Although STAR trusts are unique to the Cayman Islands, they have been in existence for 16 years and the Cayman Islands can therefore provide a sound and secure legal framework in which to set up such a trust. Helpfully, there are no reported or known examples of cases in or outside the Cayman Islands in which the validity or integrity of STAR trusts has been questioned.
Some salient features of STAR trusts are the following:
• a trust company licenced in the Cayman Islands under the Bank and Trust Companies Law must be the trustee of a STAR trust, unless the trustee is a private trust company, and there may in addition be a foreign co-trustee;
• there must be at least one enforcer, who may or may not be a beneficiary, who has the standing to enforce the trust. An individual beneficiary under the trust has no standing to enforce the trust unless he is appointed as an enforcer;
• the objects or beneficiaries of a STAR trust can be persons of any number and/or purposes of any number or kind, charitable or non-charitable, provided such purposes are lawful and not contrary to public policy;
• any uncertainty as to the objects or modes of execution or administration of a STAR trust can be resolved by the trustee or any other person as provided by the trust document;
• copies of the trust documents and certain other documents relating to the STAR trust must be held by the Cayman Islands trustee within the Islands; and
• a STAR trust which cannot be executed or administered in whole or in part, because it is impossible, impracticable, unlawful or contrary to public policy or is obsolete in that, by reason of changed circumstances, it fails to achieve its general intent can be reformed by the courts.
STAR trusts have many useful applications. Settlors can create STAR trusts in cases when they are not certain that their purposes qualify as exclusively charitable. A STAR trust may be used to establish philanthropic or quasi-charitable trusts, given that many worthy causes are not necessarily charitable. A STAR trust may also be used where, for example, the settlor wants to benefit his family but also wants to ensure the continuation of his family business in perpetuity.
Since the effect of a trust is to divest the settlor of the ownership of the property in favour of the trustee and for the benefit of beneficiaries, Cayman trust structures can be used to achieve a wide variety of uses. Some of the more common uses of trust structures include succession planning, anti-forced heirship, preservation of wealth, commercial structures and asset protection.
The flexibility and confidentiality of the trusts regime in the Cayman Islands is underpinned by its well-respected legislation and judiciary, and is supported by the effect of the Confidential Relationships (Preservation) Law. This means that Cayman Islands trusts are widely used and highly respected throughout the world by ultra-high net worth individuals, international families and trusted advisers, as well as institutional and independent trustees.