Cayman Islands - Eprivateclient

Private Client
Practitioner
special review
Cayman Islands
September 2008
the magazine for leading private client professionals
Islands of
opportunity
The Cayman Islands
aims to provide a safe
environment for
private client work
in association with Cayman Island Government
Contents
FEATURES
04
10
18
3
From the Editor
4
Introduction
The Cayman Government outlines the advantages
of using the Cayman Islands for private client
work.
6
Foreign court challenges
Caymans’ law has in place provisions to protect
trusts set up there from foreign elements. Chris
Hall, an associate at Ogier, takes a look at how this
works in practice.
10
Limitation defence
Ziva Robertson, a partner at Mourant du Feu &
Jeune examines a recent court case which restricts
trustees’ use of a limitation defence when dealing
with claims made by discretionary beneficiaries.
14
Legal Advice
One area of risk management that is often
overlooked, particularly by offshore trustees is
management of available legal advice, writes Justin
Appleyard of Maples and Calders.
18
Cayman Trust Structuring
There are a range of trusts structures available in
the Cayman Islands. Chanda Glidden of Applebys
examines these and the other benefits of
establishing a trust on the Islands.
14
Private Client Practitioner | Cayman Islands Special
1
from the editor
A sunny disposition
With an average winter temperature of 78°F and around 86°F
during the summer, the climate of “perpetual summer” and
Caribbean beaches are enough to tempt many to the Cayman
Islands.
But the sun is also shining on its thriving financial sector, of
which private client work is an important part.
There were $2 trillion in banking assets as of December 2007,
according to the Cayman Islands Monetary Authority
(CIMA), with just under 300 banks registered on the islands.
There are currently over 8,000 mutual funds registered on the
islands. It also is a leading centre for hedge funds.
The creation of the STAR Trust has also helped it to
continue to compete effectively with other offshore centres for
trust work.
The Islands are among the offshore centres that have done
much to improve their reputation. The International Monetary
Fund (IMF) found the Cayman regulatory regime to be well
developed and in compliance of international standards.
The IMF also found a strong compliance culture for antimoney laundering and terrorist-financing activities.
The Islands were recently praised by the US Government
Accountability Office (GAO) as well. In July 2008 the GAO
published a report entitled Cayman Islands: Business and Tax
Advantages Attract U.S. Persons and Enforcement Challenges
Exist, designed to help Congress “better understand the nature
of U.S. persons’ business activities in the Cayman Islands.”
It praised the standards found on the Islands and its readiness
to work with outside agencies on enforcement issues. “US
officials consistently report that cooperation by the Cayman
Islands government in enforcement matters has been good,”
the report stated.
It highlighted the Islands’ “reputation for stability and
compliance with international standards” as a major
attraction for those looking to do business there.
It is perhaps unsurprising that the US government was so
keen to see what was happening in the Cayman Islands as
US tax returns show that in 2002, the latest available data
from the IRS, 193 returns were filed by taxpayers indicating
that they controlled a trust in the Cayman Islands, around 7
percent of all controlled foreign trusts.
US tax returns show these foreign controlled trusts
reported about $472 million in income and Cayman
Islands-based trusts accounted for nearly 28 percent of that
total, or about $132 million.
Tristan Blythe
Editor
EDITORIAL ADVISORY BOARD
Jeremy Arnold
Roderick Balfour
Edward Buckland
Jonathan Conder
Wilson Cotton
Joe Donohoe
Anthony Edwards
Andrew Fisher
Ceris Gardner
Charles Gothard
Warwick Hensley
Matthew Hutton
Simon Jennings
James Johnston
David Kilshaw
Christopher Lintott
Clive Mackintosh
Alison Meek
David Mellor
Richard Moyse
Stephen Pallister
John Riches
Justin Ripman
Fiona Smith
Barclays Wealth
Virtus Trust
Bedell Trust Company
Macfarlanes
Smith & Williamson
Royal Bank of Canada
Farrer & Co
Towry Law
Allen & Overy
Speechly Bircham
Deloitte & Touche
Chartered Tax Adviser
Rawlinson & Hunter
Bircham Dyson Bell
KPMG
Penningtons
PricewaterhouseCoopers
Harcus Sinclair
Dixon Wilson
Boodle Hatfield
Charles Russell
Withers
Mills & Reeve
Forsters
Paul Stibbard
Jean-Marc Tirard
Rhoddy Voremberg
Matthew Wrigley
Andrew Young
Baker & McKenzie
Tirard Naudin
Wilsons
Wrigleys
Lawrence Graham
EDITORIAL
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Private Client Practitioner | Cayman Islands Special
3
introduction
A financial
hotspot
As well as stunning beaches and hot weather
the Cayman Islands is well known for its strong
financial services sector, much of which was built
on the back of its private banking and trust
business. Despite the growth of institutional
business the Cayman Islands still aims to be a
strong, secure and sustainable choice amongst
the world’s leading private client jurisdictions.
T
Cayman Islands Government
he private client sector of the
global financial services industry
is large and growing, research
shows assets under management by
global wealth management firms are
valued at US$17.4 trillion, with an
estimated further US$9 trillion of private
wealth not yet under management.
These figures suggest that private
clients, particularly those from emerging
markets where the concept of wealth
management is still in its infancy, are a
significant market segment and will
continue to require sound, high quality
wealth management services from service
providers with expertise and integrity.
Tax neutrality and common law
The Cayman Islands has always been an
open, free market, economy, and from the
1960s onwards, successfully invested its
“historic capital” – tax neutrality and
English Common Law – to the benefit of
4
Cayman Islands Special | Private Client Practitioner
the financial services sector. This sector
includes service offerings in banking,
investment funds, captive insurance,
companies and partnerships, trusts,
structured finance, vessel and aircraft
registration and securities listing on the
Cayman Islands Stock Exchange; and the
Cayman Islands enjoys significant market
share in a number of these areas.
The same fundamentals that drive the
Cayman Islands’ position as a preferred
provider of services to global institutional
business are attractive to private clients - in
particular, an excellent professional
infrastructure (including five of the top 10
largest global wealth management firms) in
an environment of economic and political
stability and a strong compliance culture.
While the institutional book of
business may now be larger, private
banking and trust services in the
Cayman Islands were the nucleus that
enabled the growth and diversification
of the country’s financial services sector
and continues to be important today. For
example, Cayman is a leading
jurisdiction for private equity vehicles
and Cayman Islands practitioners are
highly regarded for their expertise in
delivering trust, fiduciary services and
banking services specific to the needs of
the wealth management business.
The following pages of this
supplement, authored by some of
Cayman’s leading practitioners in the
private client area, will showcase the
jurisdiction’s expertise and demonstrate
why the Cayman Islands is able to offer
secure, diverse and globally recognised
services in this highly competitive sector.
International standards and rule
of law
Key to maintaining Cayman’s position as
a leading financial services centre is
adherence to relevant international
standards; respect for the rule of law,
due process and the right to privacy; and
progressive reinforcement of Cayman’s
international cooperation channels.
introduction
These features form an integrated
approach designed to ensure that
Cayman is able to attract and retain
both private client and institutional
business that share the jurisdiction’s
commitment to compliance.
As an indicator of this commitment,
the most recent external AML/CFT
evaluation (CFATF, November 2007)
rated Cayman as ‘compliant’ or ‘largely
compliant’ on 38 of the FATF 40+9
standards, which puts the jurisdiction in
the first rank of evaluated countries.
Both the 2007 CFATF evaluation and
the 2005 IMF evaluation noted
Cayman’s well-developed compliance
culture.
Regulation fueled growth
In fact, Cayman has been ahead of the
compliance curve in a number of areas,
including for example, in the regulation
of trust services, which was
implemented in the 1960s. Based on
experience, it is evident that appropriate
regulation and adherence to recognised
international standards – not absence of
regulation – has and will continue to
fuel sustainable growth of the Cayman
Islands’ financial services sector.
In parallel with ensuring that the
regime for financial services remains
responsible in terms of international
standards and obligations, an eye to
commercial responsiveness is important
as well. In that regard, recent legislative
developments in the trust area allow for
a registration regime for private trust
companies, to round out the service
offerings.
The Cayman Islands puts a premium
on promoting commercial certainty for
clients around the world. And for the
private banking and trust sector, this
also translates to our commitment to
ensuring that doing business with the
Cayman Islands remains the strong,
secure and sustainable choice for the
long term.
For more information on the Cayman
Islands financial services, visit
www.caymanfinance.gov.ky.
Private Client Practitioner | Cayman Islands Special
5
foreign court challenges
A case for
the defence
For a variety of reasons foreign courts may
challenge a Cayman Islands trust. However the
Cayman Islands have provisions in place to
protect trusts from such challenges and its
Courts have already decided on a number of
such cases.
A
Chris Hall
Associate, Ogier
6
wise settlor of a trust will bear in
mind the application and
potential consequences of foreign
elements to his trust. The Trusts Law
(2007 Revision) of the Cayman Islands
contains provisions to protect Cayman
Islands’ trusts from foreign elements.
These provisions, which were inserted into
the Trusts Law in 1987, are contained in
Part VII headed Trusts - Foreign Element.
The key provision of Part VII is section
90. It provides that all questions arising in
regard to a trust which is governed by
Cayman law or in regard to any disposition
of property upon the trusts of such a trust,
are to be determined according to the laws
of the Cayman Islands without regard to
the laws of any other jurisdictions with
which the trust or disposition may be
connected, including questions as to:
a) the capacity of any settlor;
b) any aspect of the validity of the trust or
disposition or the interpretation or
effect thereof;
c) the administration of the trust, whether
Cayman Islands Special | Private Client Practitioner
the administration be conducted in the
Islands or elsewhere, including
questions as to the powers, obligations,
liabilities and rights of trustees and
their appointment and removal; or
d) the existence and extent of powers,
conferred or retained, including powers
of variation or revocation of the trust
and powers of appointment, and the
validity of any exercise thereof.
Sections 91 and 92 also preclude the
enforcement of an heirship right conferred
by foreign law affecting the property held
by the Cayman trust, subject to the
provisos in section 90.
Lemos v. Coutts & Co.
The Cayman Islands’ courts have
considered Part VII in a number of
decisions. The first decision of interest is
Lemos v. Coutts & Co. This was a
decision of the Court of Appeal (Zacca, P.,
Henry and Kerr, JJ.A.) on appeal from the
Grand Court of Cayman at first instance.
At issue was a trust settled by a
foreign court challenges
Private Client Practitioner | Cayman Islands Special
7
foreign court challenges
deceased Greek shipowner. The trust
was expressly governed by Cayman law.
It gave the trustees extremely broad powers
to administer the trust after his death,
including an absolute discretion with
respect to the production or inspection
of accounts.
The first appellant, the settlor’s son,
brought proceedings in the Grand Court
against the trustees of his father’s estate
alleging breaches of trust and seeking their
removal as administrators of the trust.
The settlor’s widow and daughters were
joined in those proceedings and supported
the trustees.
The first appellant and the settlor’s other
son, who were discretionary beneficiaries of
the trust, brought separate proceedings in
Greece challenging the validity of the trust
and the dispositions under it in reliance of
summons for judicial accounting and for
the disclosure of named documents and
accounts. In response, the trustees sought
certain orders with respect to those
summonses as well as orders and directions
in connection with their defending the
Greek action.
On the hearing at first instance of one of
the interlocutory applications, Malone C.J.
of the Grand Court of the Cayman
Islands, in Re Lemos Trust Settlement,
made the following remark about the effect
of Trust (Foreign Element) Law which
inserted Part VII into the Trusts Law:
“To my mind the trustees in seeking to
obtain legal advice in connection with the
Greek actions are, prima facie, acting
properly since the objective of the Greek
actions is to set aside the trust - an
objective which, if pursued here, would be
A wise settlor of a trust will bear in
mind the application and potential
consequences of foreign elements to
his trust
Greek law relating to the movable property
of an intestate dying domiciled in Greece.
In the course of the Cayman proceedings,
the first appellant obtained injunctions to
prevent the trustees from exercising their
controlling powers while he and his
brother pursued independently the Greek
and Cayman actions. He also filed
8
unlikely to succeed because of the
provisions of the Trust (Foreign Element)
Law, 1987.”
The Court of Appeal heard together a
number of appeals from the proceedings at
first instance. The rulings of the Court
serve to illustrate the extent to which it
was prepared to endorse the actions of the
Cayman Islands Special | Private Client Practitioner
trustees in defending the Cayman trust,
and the trustees were right to ask for
directions and would be indemnified for
the costs of so doing.
In Re Ojjeh
Another case that illustrates the
application of Part VII in protecting a
Cayman Islands trust from foreign
elements is In Re Ojjeh. Once again, there
were proceedings in a foreign court
concerning the Cayman Islands trust.
These proceedings were brought in France
by the settlor’s widow, in which she sought
to challenge the administration of the
trust on behalf of herself and her son.
The trustee sought to intervene in the
French proceedings, with the object of
limiting the scope of any disclosure orders
affecting the trust’s assets. In concurrent
proceedings brought before the Grand
Court of the Cayman Islands, the Grand
Court approved the trustees’ past actions
to limit disclosure of information about
the trust as regards a large network of very
valuable companies. In so approving the
trustees’ actions, the court made the
following comment:
“The trustees and the beneficiaries
should be in no doubt that they should
refer disputes or doubts as to disclosure to
the Cayman Court.”
The Grand Court also made an order
allowing the trustee to intervene in the
French proceedings regarding the
guardianship of a beneficiary of the trust
who was a minor and son of the settler and
his widow. The court explained:
“Since it was plainly in the interest of the
trust as a whole that the trustees should be
allowed to regain control of a situation
which had resulted in multifarious
breaches of the trust companies’
confidentiality, the court would also
authorise their participation in the
European proceedings and give directions
accordingly…the trustees should have the
opportunity, in particular, to urge a foreign
court to consider Cayman law as the
proper law governing the trust, and to
foreign court challenges
present what was a good arguable case
before those courts.”
The other side of the Atlantic
The application of Cayman law has also
been applied to cases on the other side of
the Atlantic Ocean. In the matter of H the
validity of Cayman trust was questioned by
the Pennsylvania District Court. The
applicant, a US citizen and the trustee of
the Cayman trust, was subpoenaed by a
grand jury in Pennsylvania to give evidence
relating to assets in the trust, which his
father had set up. The applicant sought
directions under the Confidential
Relationships (Preservation) Law (1995
Revision) on whether he should comply
with the subpoena.
The Court held that since the applicant
had received the information in the course
of business of a professional nature, he was
correct to ask for directions, furthermore
he was required to ask for guidance by the
Trusts Law. It was against public policy to
allow disclosure of information whilst the
legal challenge to the validity of the trust
was pending. Moreover the Court stated;
“the subpoena not only came from the
grand jury, which as a matter of comity
the Cayman court was not obliged to
assist, and lacked the clear endorsement
of the Pennsylvania court, but it was also
intended to have extra-territorial effect
in breach of Cayman law. Even though
the applicant was a US citizen and
subject to the jurisdiction of the courts
there, neither the Pennsylvania court nor
the grand jury could, other than in
exceptional circumstances, order his
assistance in the administration of justice
in the United States.”
Accordingly the applicant was directed not
to give evidence in compliance with the
grand jury subpoena.
To adopt the words of the Honourable
Anthony Smellie, chief justice of the
Cayman Islands Judiciary, the court will
not always ‘circle the wagons’ by applying
the exclusion-of-foreign-law provisions as
was done In Re Ojjeh, Re Lemos and in
Re H. The court must be able to ensure
that there is just and sufficient policing to
prevent abuse, and they therefore must lift
the protection of the foreign element in
cases where abuse is apparent. It should be
noted once more, however, that there has
yet to be a case, in Cayman law reporting
history, of a Cayman Islands trust being
found a sham; and therefore settlors have
significant assurance that the exclusion of
foreign law provisions will be effective in
the case that their own trust is challenged
by foreign courts.
Private Client Practitioner | Cayman Islands Special
9
limitation defence
S t r e t ching
the limits
Ziva Robertson
partner Mourant du Feu & Jeune
Ziva Robertson, a
Cayman partner at
Mourant du Feu &
Jeune, looks at how a
recent court decision
has limited trustees’
use of a limitation
defence.
T
hose who have followed the big
trust litigation cases reported in the
legal press over the last decade will
have noticed that a common feature of the
cases is the longevity of the dispute and of
the ensuing litigation. This is attributable,
in large part, to the fact that one of the
underlying causes of these cases is often
some deep-seated family tensions that have
built up over many years, which can take
just as long to resolve. As cases proceed
through the courts it can be difficult for
litigants to prise the legal issues apart from
the emotive ones. Although more and
more cases are capable of resolution by
mediation, it can take a great deal of time,
money and effort to reach that stage.
Like other potential defendants to
litigation, trustees may have taken
comfort from the language of the relevant
limitation laws, which tend to be similar
in most commonwealth jurisdictions.
These appear to suggest that, with
certain exceptions and in the absence of
concealment, claims in breach of trust
must be brought within six years from
the date on which the cause of action
accrues. If proceedings for breach of trust
10 Cayman Islands Special | Private Client Practitioner
are commenced after that time, the
trustees would have a good limitation
defence and this would result in some
limits to their exposure.
In July 2006, in an important decision
for the trust industry in the
commonwealth, the Cayman Islands'
Court of Appeal in Lemos v Coutts
considered the proper construction of
section 27(3) of the Cayman Islands'
Limitation Law, which substantially
mirrors section 21 of the English
Limitation Act. The Court held that the
limitation provisions do not extend to
discretionary beneficiaries or objects of
power, who may therefore bring
proceedings at any time (and potentially
many years after the alleged breach was
committed) without having to contend
with a limitation defence on the part of
the defendant-trustees.
The Background
The issue before the Court was the appeal
of the trustees against the decision of the
Grand Court judge granting the plaintiffbeneficiaries leave to amend their
statement of claim to bring allegations
limitation defence
of wilful breach of duty, in an attempt to
avoid the consequences of an exculpation
clause in the trust deed. The trustees
contended that new allegations of a wilful
state of mind amounted to a new cause of
action, and since more than six years had
elapsed since the alleged breach of trust,
the beneficiaries of this discretionary trust
were out of time.
At first instance, the Grand Court
judge did not decide the limitation
question, as she found that the new
allegations had arisen from the same or
substantially the same facts as those
pleaded in the statement of claim, and
the amendments would thus be deemed
to date back to the institution of the
original claim. This decision would deny
the trustees a limitation defence, and
they appealed.
The Court of Appeal decided to address
the limitation question as a preliminary
point, as all other issues would fall away if
no limitation defence was available to the
trustees in any event.
The Legislation
Section 27(3) of the Cayman Islands
Limitation Law provides: "Subject to
subsections (1) and (2), an action by a
beneficiary to recover trust property or in
respect of any breach of trust, not being an
action for which another period of
limitation is prescribed by any other
provision of this Law, shall not be brought
after the expiration of six years from the
12 Cayman Islands Special | Private Client Practitioner
date on which the right of action accrued.
For the purposes of this subsection, the
right of action shall not be treated as
having accrued to any beneficiary entitled
to a future interest in the trust property
until the interest fell into possession" [The
supplied emphasis will be referred to in
this article as 'the proviso'].
In order to decide which part of the
section, if any, discretionary beneficiaries
fall under the Court had to consider the
nature of the interest of discretionary
beneficiaries. The Court noted that that
interest could not be described as an
'interest in possession' which is a 'term of
art' in trust law. Could it therefore be said
that it is a future interest for the purposes
of the legislation? Alternatively, is it a
limitation defence
present interest to be considered for the
trustees' bounty, as is more usually the
understood meaning in other trust law
contexts? Or perhaps it is something else
altogether? Since the same language is
substantially replicated in various other
Commonwealth jurisdictions, these
questions are of some importance beyond
the shores of the Cayman Islands.
The Authorities
In approaching these questions the Court
of Appeal considered the conflict between
two relevant authorities: the English Court
of Appeal decision in Armitage v Nurse
and the New Zealand Court of Appeal
decision in Johns v Johns.
In Armitage, the Court of Appeal
considered the position of a plaintiff (Paula)
who was a discretionary beneficiary until
age 25, at which point her interest vested
and she became entitled to income as of
right. Lord Millett, delivering the Court's
judgment, agreed with the judge of first
instance that for limitation purposes Paula
had merely a future interest. Although she
was a present beneficiary who was entitled
to see trust documents, and may therefore
be in a position to discover any causes of
action arising from the trustees' conduct,
this was not in itself a conclusive indication
that she had a present interest for the
purposes of the Limitation Act. In a
paragraph that came under close scrutiny in
Lemos, Lord Millett said: "The rationale of
section 21(3) [of the English Limitation
Act]… is not that a beneficiary with a
future interest has not the means of
discovery, but that he should not be
compelled to litigate (at considerable
personal expense) in respect
of an injury to an interest which he may
never live to enjoy. Similar reasoning
would apply to exclude a person who is
merely the object of a discretionary trust
or power which may never be exercised
in his favour."
By contrast, in the later case of Johns
the New Zealand Court of Appeal
described the last sentence as "difficult"
and suggested that it conflicts with the
sentence that preceded it, which
seemingly recognises that: "a person who
is merely the object of a discretionary
trust is not a beneficiary with a future
interest… [Lord Millett] may have had
in mind the situation in the case before
him in which the discretionary
beneficiary had a further interest in the
trust fund capable of falling into
possession at a future date. But, standing
alone, the sentence suggests that a mere
discretionary beneficiary fits the rationale
of the proviso. But he or she does not fit
the clear requirement of a future interest
proviso, must have failed to take account of
the possibility that discretionary
beneficiaries fell completely outside the
scope of the legislation. The Court held
that this latter possibility was the
preferable view, with the result that an
action by a discretionary beneficiary would
not amount to 'an action by a beneficiary
to recover trust property or in respect of
any breach of trust' at all: the legislation
does not capture beneficiaries whose
interest is neither vested nor can properly
be described as a future interest.
It follows that unless caught by another
provision of the legislation, a person with a
Trustees... can no longer raise a valid
limitation defence to claims in breach
of trust brought by discretionary
beneficiaries
in the trust property. We are unable to
accept that this requirement can be
construed as extending to a mere
discretionary expectation."
The New Zealand Court of Appeal held
that discretionary beneficiaries have a
present interest in the trust fund and must
bring an action in breach of trust, or for
the recovery of assets, within the six years
prescribed by the Limitation Act.
The Decision of the Cayman
Islands' Court of Appeal
Thus faced with two conflicting decisions,
the Cayman Islands' Court of Appeal
preferred the reasoning of Armitage and
concluded that the New Zealand Court of
Appeal, in focusing as it did on the
discretionary interest can bring an action
for breach of trust at any time - as was the
prevailing position in England in respect of
all breach of trust claims prior to 1888.
The implications of this decision to
trustees are far reaching: they can no
longer raise a valid limitation defence to
claims in breach of trust brought by
discretionary beneficiaries many years after
the events complained about. They may,
of course, have other defences available
to them, such as laches or acquiescence;
but since it is clear that they now have one
less arrow in their quiver, they may wish
to give careful consideration to other
ways and means by which discretionary
beneficiaries may be included in, and
bound by, the decisions and actions of
Private Client Practitioner | Cayman Islands Special 13
legal advice
Taking your
own advice
Knowing at which turn to take independent legal
advice can be difficult for offshore trustees.
Justin Appleyard of Maples and Calders looks at
how best to manage the available legal advice.
Justin Appleyard
partner Maples and Calder
T
he competition for supplying
offshore trustee services has never
been fiercer. Consequently, and
understandably, offshore corporate
trustees want to appear accommodating
to the onshore lawyers and work referrers
who feed them new trusteeships. Getting
a reputation for insisting on taking
independent legal advice at every turn
can result in an offshore trustee being
labelled "difficult."
To examine the dangers for the offshore
trustee of sometimes having and sometimes
not having independent legal advice it is
useful to work through the chronology of
setting up, running and then terminating a
typical trust.
Setting up an offshore trust
Most new Cayman Islands trusts are set up
using the standard form of the relevant
Cayman Islands trustee prepared for it by
its Cayman Islands trusts lawyers. Armed
with further precedents that cover most
likely events during the life of the trust, the
trustee may never need to take any specific
legal advice on that trust. This is how most
modern Cayman Islands trusts operate
profitably for all concerned – even for the
lawyers (someone has to draft the
precedents, after all).
It becomes more complicated, however,
when the settlor asks the trustee to make
substantive changes to the trustee's
precedent. The trustee is eager to help but
the changes often require legal advice. The
trustee's instinct is to instruct the law firm
that drafted the precedent. Those attorneys,
as inclined to please their client as they
are unwilling to turn away fees, will often
attempt the re-drafting based
on what they think the trustee thinks the
settlor wants.
Any drafting done by the trustee's
attorneys can only, by definition, be done
on the instructions of the trustee. The
trustee must therefore have accepted a
responsibility to the settlor to understand
his objectives and to ensure that the
trustee's attorneys correctly implement
14 Cayman Islands Special | Private Client Practitioner
those objectives in the drafting. Indirectly,
the trustee has become an adviser to the
settlor on the terms of the trust.
Cayman Islands trustees also obtain
new business by direct introduction from
an onshore law firm acting for the
proposed settlor. In many cases, onshore
lawyers build a good relationship with a
particular offshore trustee, get to know
that offshore trustee's precedents and
use those precedents as the starting
point for generating draft trusts for any
particular settlor.
At the other end of the scale are the
trust deeds drafted by lawyers who have
taken a trust from their own precedent
system and have merely changed the
governing law clause from their home
country to the Cayman Islands. In those
circumstances, it is more difficult for the
trustee to be able to decide whether the
trust is valid at all and, even if it is,
whether the trust is going to be
administratively workable (profitable)
within the fees the trustee has negotiated.
In these circumstances, either the
settlor's attorneys or the trustee may
instruct Cayman Islands attorneys. It is
important to establish who is acting for
whom and, equally, who is not acting for
whom. If the settlor instructs the
Cayman Islands attorneys, he may be
able to persuade the trustee not to take
independent advice by showing the
trustee the advice the settlor has
obtained about the prima facie validity
of the trust. That also works the other
way around: the trustee may be able
to demonstrate its co-operation by
showing the settlor's onshore lawyers
the Cayman Islands advice the trustee
has obtained about the prima facie
validity of the trust.
During the life of the trust
The same issues arise during the life of
the trust. The trustee tends to hear from
the onshore lawyers for the settlor
regarding any proposed exercises of any
powers. It is important for the trustee to
remember that the onshore lawyers are
not acting for it. Carrying out the
settlor's instructions to achieve his
objectives, the onshore lawyers will draft
many of the documents by which the
trustee will exercise powers that the
settlor wants the trustee to exercise. The
trustee is again faced with the dilemma
of not wanting to appear difficult but
having to remember that the document
put in front of it for signature has been
drafted by lawyers neither qualified in the
jurisdiction of the governing law of the
trust nor obliged to protect the trustee.
Some of the most difficult negotiations
arise in this context. The settlor's lawyers
may take a robust view of the scope of
one of the trustee's powers while the
Cayman Islands lawyers for the trustee
may take a different view to protect the
trustee from any doubt.
The implications of this for the client
relationship lead careful trustees to
consider whether or not to take legal
advice at all and the capacity in which
they might take it. This depends on how
much the trustee wants to keep the
settlor happy. Advice that a trustee takes
as trustee, the cost of which it intends
legal advice
to pay from the trust fund, may be advice
the beneficiaries are entitled to see. The
careful trustee may think twice about
seeking that advice in that capacity. (This
is another variation of the wellestablished maxim: "Do not ask a
question to which you do not already
know the answer"). If a trustee wants
advice and to remain free to decide what
action it will then take, it may decide to
seek advice personally and not as trustee.
Terminating the relationship or
trust
A termination of the trust by an outright
distribution to a beneficiary has largely
been discussed above.
If the relationship between the trustee
and the family is to end but the trust is
to continue, there will be a change of
trustees. There are few clauses more
tortuous in offshore trust deeds,
particularly older deeds drafted when
settlors had less confidence in offshore
trustees. When put to the test, the many
pages of elaborate provisions often do
not work properly, ignore the statutory
provisions and rely heavily on notice
procedures involving protectors and
other creatures.
A change of trustees made by the
outgoing and incoming trustee is often
nonetheless driven by the settlor and will
be drafted by his attorneys. Both trustees
16 Cayman Islands Special | Private Client Practitioner
have to decide whether they are happy to
sign a document prepared by lawyers
who are acting for neither of them. The
outgoing trustee, in particular, as the
party exercising the power, has to be
careful either to work through the
procedure for a change of trustees for
itself or to seek advice.
These issues need to be resolved before
approaching the still thornier question of
indemnification between the trustees.
Again, both trustees need to think
carefully about who has drafted that
indemnity, for whom that lawyer was
acting and therefore what instructions (if
any) that lawyer will have had and will
have not had.
cayman trust structuring
A trust worthy
Jurisdiction
The Cayman Islands has developed a range
of structures designed to make the
jurisdiction attractive to those looking to
establish a trust. Chanda Glidden, a
Cayman-based associate at Appleby, takes a
look at the benefits of Caymans trusts.
Chanda Glidden
associate Appleby
T
he Cayman Islands, known
mainly for its favourable tax
benefits and strong financial
industry, has over the years developed
into an internationally respected
offshore jurisdiction for the
establishment of trusts.
In addition to offering all the
commonly recognised trust structures,
Cayman trust law embodies progressive
trusts legislation which has removed
many of the traditional limitations of
the trust vehicle. Even with the
introduction of hybrid structures, such
as the STAR Trust, the more traditional
Cayman trust structures have not lost
their shine.
allows settlors to strictly define exactly
what the trustee can and cannot do, when
they can do it, for whose benefit and what
will happen if circumstances change.
Discretionary Trusts
Charitable Trusts
Discretionary trusts are still one of the
most common trust vehicles used in the
Cayman Islands. Trustees are given an
absolute discretion as to how to manage
and invest the trust estate and how
much and to whom distributions should
be made.
A charitable trust may be established
under Cayman Law whereby the
definition of charitable objects strictly
follows the English common law
definition under the Charitable Uses Act
of 1601, which was separated into the
four heads of charity set out in Income
Tax Special Purposes Commissioner v
Pemsel, [1891-4] All ER 28.
Recent developments have also seen
charitable trusts used as part of
Strict Settlements
In direct contrast to a discretionary trust
is a strict settlement. This type of trust
Exempted Trusts
It is important to note that the Cayman
Islands do not presently have income or
capital gains taxes; however, in the event
this ever changes a featured advantage
under Cayman Law is that a trust can
be registered as an “exempted trust” by
which an undertaking can be obtained
so that for a period of up to fifty years,
any law enacted imposing income or
capital taxes will not apply to any
property under the trust.
18 Cayman Islands Special | Private Client Practitioner
structured finance transactions, where
particular assets are settled into a
charitable trust so that the assets will no
longer be owned by the settlor and will
be deemed to be “off-balance sheet.”
These structures are particularly useful
for the repackaging of securities and
other self-financing transactions.
STAR Trusts
STAR Trusts are unique to the Cayman
Islands and were introduced under the
Special Trusts (Alternate Regime) Law
1997, (STAR Law). STAR Trusts allow
for the objects of the trust to be both
persons and/or purposes and they can be
used to establish philanthropic or quasicharitable trusts to benefit worthy causes
that are not necessarily charitable at law.
In addition STAR Trusts may be applied
in estate planning circumstances where a
settlor may want to ensure the
continuation of his family business while
simultaneously benefiting his family. A
detailed discussion of STAR Trusts is
beyond the scope of this article.
Legislative Benefits
Cayman Islands Law, which is derived
from English common law and
supplemented by local legislation,
ensures that business in the Cayman
Islands is conducted in the context of a
sophisticated, respected and reliable
legal system.
The Trusts Law (2007 Revision)
(Trusts Law) incorporates the Trust
(Immediate Effect and Reserved Powers
Law) Law 1998 and the STAR Law. In
addition to the Trusts Law, Cayman has
the Fraudulent Dispositions Law (1996
Revision) and the Perpetuities Law
(1999 Revision). Some of the key
features arising from the legislation are
settlor reserved powers, perpetuity
periods and asset protection.
Settlor Reserved Powers
Under the Trusts Law, certain powers
may be reserved to the settlor or granted
to someone else without invalidating the
trust. These include the power to
appoint or remove the trustees, power
to consult or direct investment
management functions, power to give
binding directions to the trustee in
connection with the acquisition or
disposition of property, power to
act as a director or officer of any
company wholly or partly owned by
the trust and power to direct
distributions to the beneficiaries.
Perpetuity Periods
The modern and simplified approach
taken by the Perpetuities Law on the
application of the rule against
perpetuities has ensured the validity of
certain trusts which would typically be
invalid under the rules of common law.
Prominent changes include establishing
a maximum fixed term of 150 years; and
introducing the principles so that a gift
in trust will not fail for remoteness of
vesting until it is established that the gift
will not vest within the perpetuity
period. Worth noting is that charitable
and STAR trusts are not subject to the
rules against perpetuity and are perpetual
in nature.
A safe, secure location for trusts
cayman trust structuring
Asset Protection
Coupled with Cayman’s strong antimoney laundering culture, the Fraudulent
Dispositions Law makes any disposition
of property on to a trust voidable by a
creditor where the disposition is made
with intent to defraud such creditors.
Any fraudulent disposition claims
made by creditors must be brought
within six years after the relevant
disposition and the burden of proof to
well-developed legal system, stability
and strong financial services industry.
Key features included:
■ Trusts can be established in a matter
of days;
■ No requirement to have a Cayman
Islands trustee for most types of
trusts;
■ Progressive trusts legislation which
has removed many of the traditional
limitations of the trust vehicle;
“Cayman Islands Law ensures that
business in the Cayman Islands is
conducted in the context of a
sophisticated, respected and reliable
legal system”
establish the fraudulent intention rests
on the creditor.
Other important trust related laws
include the Banks and Trust Company
Law (2007 Revision) which provides for
the establishment of private trust
companies and the Confidential
Relationships (Preservation) Law (1995
Revision) which aids in securing client
privacy including but not limited to
trust disputes which may otherwise be
subject to public record.
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Jurisdictional Benefits
The Cayman Islands are a British
Overseas Territory and have steadily
established an international reputation
as a reliable offshore centre due to its
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20 Cayman Islands Special | Private Client Practitioner
Central time location (GMT-5)
making it conveniently accessible;
No direct taxes such as capital gains,
income, profits, corporation or
withholding taxes;
Money and securities in any currency
to be freely transferred to and from
the Cayman Islands;
Full compliance and an established
commitment to implementing the
best international anti-money
laundering practices;
Great flexibility with respect to the
operation of international
corporations and corporate group
structures;
Legal opinions that are routinely
relied upon in overseas transactions.
The Local Trust Community
The Cayman Islands are able to offer the
availability of world-class professional
services through a host of trust companies,
trustees, lawyers, accountants and other
service providers who specialise in
providing trust and trust related services.
The existence of so many
complimentary fiduciary services in one
jurisdiction means that the simplest to
the most complex trust structures can be
readily facilitated. Additionally, many
top service providers based in the
Cayman Islands are part of a larger
global organisation allowing clients to
optimise globalisation of business
transactions.
Furthermore, the Cayman Islands
Monetary Authority provides valuable
regulation and supervision of the
financial services industry, ensuring that
a first class financial system is
maintained. Whilst having regard to
international standards, the Authority
understands the need for operational
freedom by service providers in order to
preserve a dynamic and competitive
industry.
The final facet of the local trust law
community is the Cayman Islands
judiciary. The court system is well
developed, user-friendly and takes a
serious interest and proactive approach
to the guidance and development of
trust law. Recent examples of what have
become internationally known cases,
originating from the Cayman Courts
include AN v Barclays Private Bank and
Trust (Cayman) Limited and others 2006, 9 ITELR 630; Re the Circle Trust;
HSBC International Trustee Limited v
Wong and others - 2007, 9 ITELR 67;
and Wahr-Hansen and another v Compass
Trust Co Ltd and others - 2007, 10
ITELR 283 and 580.
Its well-developed and stable legal
system, supported by its strong financial
services industry and global presence
demonstrates that the Cayman Islands
are worthy of their designation as a
leading jurisdiction for the
establishment of trusts.