The Cayman Islands as a Trust Jurisdiction

The Cayman Islands has established itself as the pre-eminent jurisdiction for the creation of private and commercial trusts. With a modern legislative framework, a respected court system[1], a wide pool of professional advisors and fiduciary service providers, political stability, and a favourable time zone, the Cayman Islands has all of the necessary ingredients to manage wealth and valuable assets successfully via the trust route.

Trust Law

Trust law in the Cayman Islands is derived from English statute and common law and is supplemented by local legislation. The primary trust legislation is contained in the Trusts Law (2009 Revision) (the ‘Trusts Law’), the Fraudulent Dispositions Law (1996 Revision) and the Perpetuities Law (1999 Revision).

The Trusts Law permits settlors (or other persons specified by the settlor) to reserve certain powers, including, but not limited to, powers to revoke, vary or amend the trust, powers to appoint income and capital, powers to retain a limited interest in trust property, and other helpful powers such as a power to add or remove any trustee, protector or beneficiary without compromising the integrity of the trust.

The most common forms of trusts created in the Cayman Islands are discretionary trusts, reserved power trusts, and non-charitable purpose trusts (known as STAR trusts). Fixed interest trusts, charitable trusts, and bare trusts are also widely used. For the purposes of this article, I will focus on the unique forms of trusts available in the Cayman Islands.

STAR Trusts

Perhaps the most unique and popular trusts available in the Cayman Islands are non-charitable purpose trusts otherwise known as ‘STAR’ trusts.

A STAR trust permits a settlor to create a trust for non-charitable purposes or beneficiaries (or a combination) as long as these purposes described are lawful and not contrary to public policy.  The only individuals with standing to enforce a STAR trust are Enforcers[2]. An Enforcer is mandatory for all STAR trusts as the rights of enforcement and rights to information are removed from the beneficiaries (if any) and are vested in the Enforcer. 

As the primary duty of the trustee of a STAR trust is to carry out the purposes for which the trust is established, settlors can be confident that such purposes cannot be frustrated by beneficiaries attempting to defeat their intentions. Trustees of STAR trusts can also be confident that as long as they are carrying out the purposes in a correct manner, they have little to fear by way of vexatious litigation from beneficiaries[3]. The preservation of trust assets can be made to be a purpose of the trust, thus avoiding the requirement of trustees to diversify the trust fund, which is highly attractive for both settlors who wish to preserve assets (such as shares in a private company) and for trustees who do not have to sell certain trust assets to achieve diversification.

There is a strong oversight mechanism for each STAR trust as it is a requirement that at least one Cayman Islands trust corporation or a registered private trust company act as the trustee (or one of the trustees) of a STAR trust. Cayman Islands trust corporations are in turn subject to the supervision of the Cayman Islands Monetary Authority[4] (‘CIMA’).  CIMA ensures that professional standards are maintained, and enforces penalties for non-compliance with the law in appropriate cases.

STAR trusts have proved themselves to be highly useful in both a private client sphere and in a commercial context. They are highly flexible and robust and are virtually unlimited in the purposes they can achieve.

Reserved Power Trusts

Section 14 of the Trusts Law permits settlors to reserve (or grant to other persons) certain powers including power to:

1. Revoke, vary, or amend the trust deed or any powers contained in the trust deed;
2. Appoint income and/or capital;
3. Reserve a limited beneficial interest in the trust property;
4. Act as a director or office of a company wholly owned by the trust;
5. Give binding directions to a trustee regarding the sale or purchase of trust property;
6. Appoint, add or remove any trustee, protector, or beneficiary;
7. Change the governing law of the trust;
8. Restrict the exercise of powers[5] contained in the trust deed.

The reserved power trust works very well for the settlor who is hesitant to release full control of property to a trustee. Reserving the power to direct investments or make appointments of income and/or capital tend to be the most popular reserved power, however, many settlors also prefer to retain more subtle control by reserving the power to add and remove trustees. Trustees also like reserved power trusts as it relives them of certain responsibilities and thus reduces their operating risk. Some powers, however, can work against trustees such as the power reserved to the settlor to remove trustees which can result in the abrupt and unexpected removal from office.

Overall, reserved power trusts operate very well where the settlor is concerned about retaining some degree of control or where the trustee wishes to limit the scope of its fiduciary duties. They are not, however, suitable in all instances and settlors will need to take advice as to the effect of reserving certain powers in their home jurisdictions[6]. 

Jurisdiction of the Cayman Islands Courts

Pursuant to the Trusts Law and subject to any express terms in the trust deed, all questions arising with regard to a trust. which is governed by the laws of the Cayman Islands, will be determined in accordance with the laws of the Cayman Islands, including all questions as to the capacity of the settlor, any aspect of the validity of the trust or its interpretation or effect, the administration of the trust, and the validity of the exercise of any fiduciary or non-fiduciary powers. 

The Cayman Islands court will not recognise a forced heirship claim which seeks to defeat an otherwise valid Cayman Islands trust, and such claims cannot be enforced against assets held in a Cayman Islands trust[7] simply because the laws of the foreign jurisdiction prohibit or do not recognise the concept of a trust.  

There are limited exceptions provided in the Trusts Law, for example, the application of Cayman Islands law should not validate any disposition of property:

1. Where the settlor did not have proper title to the property so settled;
2. If the property is settled contrary to an express term in a trust deed;
3. If the property settled is subject to a restriction in corporate capacity;
4. iI the formalities relating to the proper disposition of property have not been observed;
5. If in contrast to rules relating to immovable property; and
6. If the terms are contrary to foreign restrictions regarding testamentary trusts.   

The Cayman Islands has thus developed a very powerful legislative deterrent to repel hostile claims and the jurisdiction fiercely protects the rights of settlors to dispose of their property free of interference from foreign courts or litigants. 

Perpetuities

Prior to 1 August 1995, the English common law rules against the vesting of trust property and perpetuity applied. For trusts created after 1 August 1995, the common law rules on perpetuity have been abolished and have been replaced with a maximum 150-year perpetuity period. The Cayman Islands has also introduced a ‘wait and see’ principle so that a gift will not fail if it in fact vests within the statutory perpetuity period. STAR trusts and charitable trusts, however, are both capable of being perpetual.

Fraudulent Dispositions

Settlors of Cayman Islands trusts are subject to the Fraudulent Dispositions Law (1999 Revision), which provides that any disposition of property made at an undervalue is voidable within six years at the instance of a creditor if that disposition was in fact an attempt to defraud creditors. The burden of proof to establish the fraudulent intention is imposed upon the creditor. The limitation period in the Cayman Islands is similar to many onshore jurisdictions, and as such, it is more likely to be recognised in a foreign court as a legitimate and reasonable limitation period. 

Private Trust Companies

Private Trust Companies (‘PTCs’) have been permitted in the Cayman Islands since 2008. PTCs have proved popular to those persons who wish to maintain direct control over one or more connected trusts.

Under the Private Trust Companies Regulations (2008) a Cayman Islands PTC, which only conducts ‘connected trust business’ and is registered with CIMA[8], does not require a trust license. ‘Connected trust business’ is defined as business for persons to whom the settlor is connected, usually by relationships of blood or marriage. The definition, however, extends to companies within the same group having common ownership. The 2008 PTC Regulations were therefore designed to make it easier for individuals to manage groups of family trusts without the excessive administrative burden normally required to obtain a full trust license. 

PTCs are increasingly popular in the Cayman Islands as they offer significant advantages to high net worth individuals who wish to have a direct say in how their trusts are managed and controlled. It is also now permissible for a registered Cayman Islands PTC to act as the sole trustee of a STAR trust, thus offering settlors the widest possible degree of flexibly and control over property settled into trust. 

Confidential Information

The Cayman Islands has embedded in its law strong confidentiality provisions, which are contained in the Confidential Relationship (Preservations) Law (2009 Revision).

Cayman Islands case law acknowledges the accepted common law principle that the trustee owes fiduciary obligations not to divulge trust information except in accordance with the law which governs the trust. The Cayman Islands Courts have considered this duty in the context of requests for the release of information regarding assets held on trust in response to subpoenas or to assist with inquiries by international regulators. The Cayman Islands courts have followed the approach set out by the Privy Council in Schmidt v Rosewood[9] regarding  the disclosure of information to beneficiaries. As such, requests for information by beneficiaries are considered to fall within the inherent jurisdiction of the Cayman Islands court to supervise the administration of the Cayman Islands trusts, thus making the possibility of disclosure of trust information to non-beneficiaries very remote. 

The OECD

The legitimacy of the Cayman Islands as an offshore financial centre has recently been confirmed by the elevation of the Cayman Islands to ‘white list’ status by the OECD[10], which recognises that the jurisdiction has substantially implemented the OECD’s internationally agreed tax standards and anti-money laundering initiatives.

The Cayman Islands has a framework in place for the exchange of tax information internationally. For its part, the Cayman Islands’ government has entered into bilateral agreements with 24 countries[11] in relation to civil, administrative, and criminal tax matters.  It has also implemented automatic information sharing with all EU states under the EU Savings Directive. In addition, CIMA has signed a total of 14 memorandums of understanding with other jurisdictions on the sharing of tax information. 

In 2005, the Cayman Islands introduced the Tax Information Authority Law (2009 Revision), which is now the principal legislation enabling the provision of tax information by the Cayman Islands to other countries. The main purpose of the law is stated as being to provide for assistance generally in criminal and non-criminal tax matters, particularly in relation to the obtaining of information, the execution of search and seizures orders, and the interview and examination of foreign tax payers who are resident in the Cayman Islands. It is now widely accepted that the Cayman Islands operates a legitimate and transparent regime while still preserving and respecting the confidentiality of clients and their affairs.

Conclusion

The Cayman Islands continues to be a premier jurisdiction for the establishment of private and commercial trusts given its cutting-edge legislation, tax neutral environment, stable government, favourable time zone, large pool of experienced professionals, respected court system (with ultimate appeal to the UK Privy Council) and a well established body of local case law. The Cayman Islands will continue to build on strong foundations and all signs indicate it will thrive as a world-class trust jurisdiction in future.  

[1] With ultimate right of appeal to the Privy Council.

[2] An Enforcer may be a natural person or a corporate entity, and is a creature of statue and is charged with specific duties under the Trusts Law. The primary duty of an Enforcer is to ‘stand in the shoes’ of the beneficiaries of the STAR Trust (if any) to enforce their rights and to ensure any purposes specified in the trust deed are being actively pursued by the trustees. 

[3] For two reasons, firstly, only the Enforcer has a right to bring actions against the trustee of a STAR trust on behalf of the beneficiaries and secondly, the Enforcer tends to act as a buffer between beneficiaries and the trustees, and as such, the Enforcer will often dissuade beneficiaries from bringing spurious claims as the legal costs involved may ultimately have to be met from the corpus of the trust fund.

[4] The local Cayman Islands financial services regulator.

[5] Such as the imposition of consent powers.

[6] Although for asset protection trusts caution should be taken with respect to which powers (if any) should be reserved by a settlor. See the case of TMSF v Merrill Lynch Bank and Trust Company (Cayman) Limited and others [2011] UKPC 17 where a power of revocation reserved to the settlor was used to the detriment of the settlor. Such negative outcomes can be avoided with careful drafting however.

[7] Practically, however, if the assets of a Cayman Islands trust are situated outside the Cayman Islands, it is possible that a foreign court order could be applied to assets situated in the jurisdiction despite the presence of these robust Cayman Islands provisions. It is possible to “Caymanize” foreign assets to further protect them from claims of foreign courts by gifting the assets to a Cayman Islands company and then settling the share of the Cayman Islands company on trust.

[8] The Cayman Islands Monetary Authority, the local Cayman Islands regulator. 

[9] [2003] UKPC 26.

[10] Acronym for the Organisation for Economic Co-operation and Development, a multi-governmental body based in Paris.

[11] Full a full list of countries see www.tia.gov.ky