Cayman Islands: Trends In Trusts And Foundation Companies

Statutory Enhancements

Cayman has a long-held reputation for being at the forefront of statutory enhancements to trusts and related law, including as to asset protection, exclusion of foreign law, reserved powers, STAR trusts, and private trust companies (PTCs) legislation and regulations. That trend has continued with the 2019 enactment of the following enhancements to the Trusts Act:

• A statutory provision similar to what was commonly referred to as the rule in Re Hastings-Bass such that the Court may set aside a mistaken exercise of a fiduciary power, in whole or in part, including imposing any terms or conditions or other orders it considers appropriate, the effect being as if the mistaken exercise never occurred;

• Broadening of the circumstances in which the Court may approve the variation of a trust on behalf of minor and unborn children from where the variation is for their "benefit" to where it is "not to the detriment" of such beneficiaries;

• A similar broadening as to the circumstances in which the Court may sanction a settlement or other compromise of trust litigation; and

• Widening of the application of Cayman's "firewall" provisions such that they apply not just when the rights claimed are based on a family (including spousal) relationship to the settlor, but also to any beneficiary.

Other potential statutory and regulatory enhancements which are currently under consideration include:

• A law to disapply the current 150 year perpetuity law to future trusts and permit applications to Court for it to be disapplied to existing trusts;

• At long last, an amendment to the Powers of Attorney Act to provide for lasting powers of attorney; and

• Regulations to permit entities to be continued into Cayman as foundation companies.

Recent Cayman Cases

Although it is not always something potential settlors (or founders of foundation companies) wish to hear about, one of the key appeals of Cayman as a wealth structuring IFC is the strength, depth and quality of its judicial system, and the high concentration of international law firms with attorneys specialising in both non-contentious and contentious international trusts and related matters. To give just two of the more notable recent examples:

In the Matter of Poulton Trust [1]

An application by the children of the late settlor, Mr. Poulton, in respect of Mr. Poulton exercising his power to remove the children and their descendants as beneficiaries. Amongst other grounds for having their removal set aside, his adult children alleged lack of capacity on the part of Mr. Poulton and undue influence on the part of their stepmother. The children were unsuccessful on the first, but successful on the latter, ground.

As to capacity, the Court confirmed the continuing application of the Banks v Goodfellow [2] test but with due regard to the dicta in Re Key [3] which recognised that the test:

• Must be applied so as to accommodate other factors capable of impairing testamentary capacity, in a way which the Court may not have appreciated in the 19th century; and

• Is primarily about the mental capacity to understand or comprehend.

In Re Key it was noted that a person suffering a condition such as depression may have the capacity to understand what his property is and who his relatives and dependants are, without having the "mental energy" to make any decisions of his own about whom to benefit.

The Court referred to Macklin v Dowsett [4] for a summary of the applicable principles on undue influence. For undue influence to be established it must be shown that:

• A person entering into a transaction had reposed trust and confidence in another or the other had acquired some ascendancy over the person entering into the transaction; and

• The transaction was not otherwise readily explicable by the relationship between those persons.

It is not a sufficient defence against a claim for undue influence for there to be a reasonable explanation for the transaction, or that it was not manifestly to the donor's disadvantage. It must be proved that the donor had entered into the transaction of his or her own free will, independently of, and not in any way as a result of, the influence the other party was able to exercise over the donor.

Lea Lilly Perry and another v Lopag Trust Reg and another [5]

An appeal to the UK Privy Council by the widow and eldest daughter of Mr. Perry, an Israeli-qualified lawyer and businessman. In 2013, as part of his succession and wealth management planning, he transferred the share in a Cayman company to a Liechtenstein trust enterprise, as trustee of a discretionary trust. Mr. Perry's widow argued that the transfer was void as it breached her matrimonial rights under Israeli law, and also that the transfer should be set aside for equitable mistake. The lower Courts had previously found against the widow as regards the matrimonial claim.

The Privy Council dismissed the appeal on the grounds that: (i) the judge rightly relied on the expert evidence as to Israeli law and that these could amount to finding of facts, (ii) that the decision of the Grand Court as to facts should not be appealable, and (iii) that the appellants could not challenge the UK Supreme Court's ruling in Pitt v Holt [6] on trustee mistake when they had not reserved the right to do so in the lower courts.

Increasing Complexity And Sophistication

Looking back a decade or two ago, establishing a Cayman trust was a relatively straightforward matter; the complicated elements tended to be the drafting of the trust deed, the advice as to trust law generally and, perhaps, the related tax advice.

Jumping forward to today, the landscape has changed dramatically. The Cayman attorney and the intended Cayman trustee will now also need an in-depth understanding of areas such as FATCA, CRS, beneficial ownership and economic substance, and often, what might be considered more in the nature of corporate and commercial law in the case of trusts holding underlying corporate structures.

Allied to this, the structures themselves have tended to become ever more complex, particularly in terms of the value and complexity of the underlying assets and the overall structure. Often, these will involve challenging assets, such as international operating business groups, residential and commercial realty, private jets and superyachts, and increasingly, digital assets, private trust companies, family offices, philanthropic structures, and family members in multiple jurisdictions with a host of different tax positions.

Inevitably, this increasing complexity has meant that more and more of the advice is being rendered out of Cayman, although at the same time, we find ourselves working more and more with the ‘onshore’ advisers as this side of the equation has, likewise, become ever more complex.

The Trend Towards Being ‘Genuinely Offshore’

One of the other major changes in the Cayman Islands between twenty odd years ago and now is that, back then, very few of our clients had major connections with Cayman beyond having their trust, trustee, holding company and its directors and, possibly, the bank and investment account of the holding company here. On one hand, the combination of the increasing mobility of clients, ever higher taxes, the push by supranational bodies to show substance in (what they perceive to be) low tax jurisdictions and, in some onshore jurisdictions, political instability, uncertainty and divisiveness has led many HNW/UHNW clients to look to expatriate.

On the other, Cayman has been exponentially growing in sophistication and desirability as a place for HNW/UHNW individuals and families and their family offices and businesses to be based. All this has caused a major change in the landscape. Now, we are often first approached to assist the client with moving themselves, their family office and/or their business to Cayman, and then, off the back of that, also assisting with establishing a fiduciary structure, and sometimes a family office, to hold and manage their personal and business assets.

Foundation Companies (FCs)

Some of the increasingly common fiduciary structures we are seeing involve FCs, a unique to Cayman type of company introduced by the Foundations Companies Act, 2017 (the FCA). Conceptually, think of an FC as exactly the same as any other company incorporated under the Companies Act (2023 Revision), save where the FCA specifically says it is different. Some of the unique features include:

• An FC may have a "founder" with particular powers;

• Although it is required to have either a shareholder or a guaranteeing member upon incorporation, it may then cease to have any members and exist as an "orphan" entity;

• In that case, it will be required to have a "supervisor" (or, for example, a committee of supervisors) who then typically have the sort of powers members commonly have, plus frequently, various powers akin to those of a protector of a trust;

• It may have a class of discretionary beneficiaries, much like a discretionary trust except that the default position is that FC beneficiaries do not have any powers akin to those of trust beneficiaries (not unlike a STAR trust);

• An FC may have bylaws (which are not required to be filed with the Registrar, unlike the memorandum and articles) which are binding on the directors, officers and their delegates and any others who have duties under the constitution;

• The FCA includes provisions dealing with applying to the Court in the case of constitutional obsolescence or a breakdown in the appointment of directors or supervisors;

• Section 48 of the Trusts Act (2021 Revision) dealing with applying to the Court for direction applies to FCs, mutatis mutandis;

• Sections 92 and 93 of the Trusts Act, commonly known as the "firewall provisions", apply to FCs; and

• An FC's constitution may provide for the resolution of disputes by, for example, binding arbitration.

Where we are seeing FCs being used in a fiduciary structure context include:

• As registered private trust companies, thereby avoiding the added complexity and expense of having a purpose trust with a licensed trust company as trustee to hold the shares of the PTC;

• In place of the traditional structure of a licensed trust company as trustee of a trust with an underlying holding company thereby, likewise, reducing the complexity and expense;

• Where the clients are resident in Cayman (such that onshore mind, management and control issues do not apply) and wish to act as the directors of their fiduciary structure;

• As protector and enforcer companies;

• To hold challenging assets, such as digital assets and operating businesses; and

• As the basis for a family office.

Given what I say about how much things have changed in the last twenty-plus years, it would be especially brave (or foolhardy) to make too many predictions about the environment for IFCs, or the Cayman Islands in particular, even over the next decade or so. However, I think it is reasonable to assume that:

• Despite ups and downs, the world will become ever wealthier;

• Wealthy clients will become increasingly international and mobile;

• These clients will continue needing to structure their personal and business wealth, plan for its succession and provide for their families; and

• The legal, regulatory and tax environment in which they do so will become ever more complex, including in terms of the push for genuine substance in their chosen IFC.

In my view, the present trend towards consolidation into sophisticated IFCs such as Cayman, where wealthy international clients can base their fiduciary structures, and indeed themselves, their families and their businesses, will continue and grow.

1 FSD 121 of 2016 (Judgement 18 February 2022)
2 (1869-70 LR 5 QB 549)
3 [2010] EWHC 408 (Ch)
4 [2004] EWCA Civ 904
5 No. 2 (Cayman Islands) [2023] UKPC 16 (Judgment May 2023)
6 [2013] UKSC 26

Andrew Miller
Partner. Andrew specialises in all aspects of Cayman Islands and British Virgin Islands international wealth structuring for individuals and financial institutions. He is well recognised with awards and distinctions, including a STEP Founder's Award and being named in the 2023 Private Client Global Elite; a "Leading Individual" in Who's Who Legal 2023; as "highly praised" in Chambers High Net Worth 2023; as "a seasoned professional. He is a wealth of knowledge and highly respected" in the IFLR1000 2023. He is past chairman of STEP Cayman; the co-chairman of the STEP Cayman Legislative Committee, and a founding board member of the STEP LatAm Conference and the STEP Cayman International Wealth Structuring Forum. He is also the editor of the STEP Directory Cayman section. Prior to joining Bedell Cristin, Andrew was a partner and head of the global wealth structuring group at another major Cayman Islands firm.