Trusts

Definition

Legally - A Trust arises when a person (called "the Settlor") places a binding obligation, duty or aggregate accumulation of binding obligations and duties upon another person (called "the Trustee") to deal with property of whatever nature, type and description which the Trustee has in his or its possession and over which he or it has control (called "the Trust Property") for the benefit of an identifiable person or class of person, charitable or otherwise (called "the Beneficiaries") of whom the Settlor may be one, and by which any obligation or duty so placed may be enforced by the Beneficiaries; and

Simply - Placing property under the management and control of another for the benefit of an identifiable person or class of persons, which may include the person transferring the property.

Forms of Instrument

The instrument may take the form of a strict Settlement (made between the Settlor and the Trustee) or may be in the form of a Declaration of Trust by the Trustee, and may provide for the usual limited interests in succession, i.e. life tenants, annuitants, interests during the lifetime of another (interests pur autre vie) and remaindermen.However, tax planning requirements of high tax countries often require that a trust be discretionary in nature and that it contain powers of accumulating income. The Trustee can be given power to invest the trust funds with complete flexibility and all income and gains can be accumulated tax free in the Cayman Islands until such time as it is expedient to make a distribution to the beneficiaries. Often, persons setting up trusts will also set up a company to hold the cash or other property that it is intended to settle so that the sole asset of the trust is the issued capital of, and possibly loans by the Trustee to, the company.

Uses

(A) To protect assets from being attacked by possible law suits.This type of use has led to the establishment of what is called an Asset Protection Trust which has proved to be very effective when properly created.
(B) As a means of avoiding or mitigating the effect of burdensome laws and regulations, particularly those of countries imposing heavy taxes and death duties and exchange control regulations;
(C) To enable real or personal property to be held for persons who, for one reason or another, cannot or do not wish to hold and/or manage such property themselves;
(D)To make provision for dependents, friends and families privately; persons living in jurisdictions whose laws require a certain portion of their assets to be left to members of the family, e.g. Latin American countries, may establish trusts in the Cayman Islands which are not subject to forced heirship provisions of their country of residence or domicile. Since 1987 the Trusts Law allows a trust to expressly select its governing law and jurisdiction. Persons changing their country of residence or domicile or changing their citizenship may establish a trust prior to changing residence, domicile or citizenship and enjoy considerable advantages, particularly in relation to death duties.
(E) To preserve property so that it can benefit a person or class of persons in succession;
(F) To protect family property from spendthrifts;
(G) To provide for the education of family and friends;
(H) To make a gift in the future and to provide for family members in the circumstances which have or have not yet arisen;
(I) To own trading or investment companies;
(J) To enable two or more persons to hold land;
(K) To provide pension schemes for employees and their dependents;
(L) To make investment through skilled persons, thus freeing time for other business;
(M) To minimise the incidence of income tax, capital gains tax, transfer tax, estate duty and other forms of taxation imposed in high tax countries.

Classification of Trusts

Trusts can be broadly classified in the following categories:-

(a) those created by statute;
(b) those created intentionally by the act of parties;
(c) those impliedly arising from the presumed intention of parties; and
(d) those arising by operation of law, e.g. constructive trusts.

Trusts are either inter vivos (i.e. created during the Settlor's lifetime) or testamentary (created by will).

Usual Method of Creation

In the Cayman Islands, trusts are usually created by a deed made by the Settlor and the Trustee or by a declaration made by the Trustee only.

These trusts may be discretionary in nature, that is:-
(1)giving the Trustee a discretion as to which beneficiaries and the amounts by which such beneficiaries or any of them will benefit under the Trust;
or fixed in nature, that is:-
(2)allowing the Trustee no discretion as to which beneficiaries may so benefit or the amount of the benefit each is to receive;

A Declaration of Trust provides complete anonymity as to the source providing the Trust with its assets.

Tax Planning

Tax legislation in the metropolitan countries is often aimed at reducing or eliminating the tax advantages of foreign trusts. The United Kingdom, Canada and the United States all have anti-avoidance legislation that is directed at trusts created in tax-free jurisdictions. Competent tax advice should always be an integral part of the creation of a trust.

Regulation of Trusts in the Cayman Islands

The creation and operation of settlements and trusts is governed by the Trusts Law and by English Common Law principles. The Law is based on the English Trustee Act 1925 and contains also provisions based on the English Variation of Trusts Act 1958.

Keeping Anonymous While Remaining in Control of a Trust

An attorney can advise on methods by which a Settlor may remain completely anonymous but still be able to maintain some degree of influence or control over trusts which have been created.

Protectors

It is possible for trusts to provide for the appointment of persons who are called Protectors and who will give investment and other advice to Trustees.

These persons may or may not be considered to be Co-Trustees, depending on the particular circumstances. It is possible to provide that certain powers set out in a trust document cannot be exercised by the Trustee without the consent of the Protector.

The Rule against Perpetuities

The common law rule against perpetuities was abolished with effect from 1st August, 1995, in respect of instruments coming into effect after that date, but not dispositions made in exercising special powers of appointment created before that date.

Perpetuity Period

There is a statutory limit of 150 years on the perpetuity period applicable to a disposition of property and on the power to accumulate income.The maximum period that a trust may last is therefore 150 years.

Wait and See Rule

Generally, there is now a "wait and see" rule; a disposition is not void merely because it can take effect outside of the perpetuity period. Until the end of that period, a disposition is treated as if it is not subject to the rule against perpetuities. If it becomes void for perpetuity, nothing done previously in relation to it by way of advancement, application of intermediate income or otherwise is invalid.

Foreign Element

Under the Trusts Law:-

(a) a term in a trust expressly selecting Cayman Islands law to govern the trust, or a particular aspect of the trust, or selecting the courts of the Islands to be the forum for administering the trust is valid, effective and conclusive.

b) if a trust so provides, its governing law may be changed to or from the laws of the Islands.

(c) subject to certain provisos, all questions arising in regard to a trust governed by Cayman Islands law or in regard to dispositions of property under that trust, including:-
i. the settlor's capacity; and
ii. any aspect of its validity, interpretation or effect; and
iii. questions as to rights, liabilities, powers and obligations of trustees and their appointment and removal are to be determined by Cayman Islands law.

(d) Subject to the same provisos as in (c), no trust governed by Cayman Islands law is void, voidable or liable to be set aside, nor is the capacity of the settlor to be questioned, nor is any person to be subjected to any liability or deprived of any right because
i. the laws of a foreign jurisdiction prohibit or do not recognize the concept of a trust;
ii. the trust avoids or defeats foreign heirship rights.

A foreign judgment is not recognized and will not be enforced or give rise to any estoppel in so far as it is inconsistent with the provisions of the law dealing with exclusion of foreign law and heirship rights.

(e) The Law does not validate a testamentary trust of property which is invalid under the law of the testator's domicile.

The Cayman courts will apply the statute to property over which it has jurisdiction, but if property which is the subject of a dispute is situate outside of the Islands, the courts of the country in which they are located may apply its own conflict of laws rules and disregard Cayman law. Before putting property into a trust, it would be best to move it where possible (e.g. money, jewellery, art work) to the Cayman Islands or transfer it (e.g. shares, land) to a Cayman company and settle the shares of that company on trust. Even then, a foreign court may disregard the existence of the company, and Cayman law.

Exempted Trusts

The Trusts Law of the Cayman Islands provides for the creation of a type of trust known as an "Exempted Trust". Such a trust may obtain from the Governor of the Cayman Islands an undertaking that, should tax of an income or capital nature ever be introduced in these Islands, the Exempted Trust will not be subject to such tax for fifty years from the date of its creation.

Requirements for the establishment of an Exempted Trust are:-

(a) the Trust must be discretionary in nature;
(b) beneficiaries must not include Cayman residents, except charities; and
(c) the form of the trust deed must first be approved by the Registrar of Trusts.

It is possible to create an Exempted Trust by first having a draft of the deed approved, or by applying to register an already existing trust.

The Fraudulent Dispositions Law

This Law applies in place of the law in effect previously, i.e. Section 107 of the Bankruptcy Law and the English Statute of Elizabeth. A creditor who is prejudiced may set aside a disposition made

(a) at an undervalue, and
(b) with an intent to defraud.

Both characteristics are essential. The property disposed of may be Caymanian or foreign property. The creditor must bring his action within six years of the date of the disposition. "Intent to defraud" means an intention of a transferor wilfully to defeat an obligation owed to a creditor, and "obligation" means an obligation or liability (including a contingent liability) which existed on or before the date of a relevant disposition and of which the transferor had notice. The Law does not require notice to be "actual", so presumably constructive notice suffices. A creditor must therefore exist at the time of the disposition and the transferor must have notice of his claim. The burden of proving intent to defraud is on the creditor seeking to set the disposition aside.

Because contingent liabilities are included, a transferor is not protected if at the time he disposes of property he is subject to

(a) a claim by a third party (e.g. for negligence as the result of a motor car accident); or
(b) liability under a guarantee, even if no demand has been made or could be made (because there has been no default by the principal obligor).

The transferor's solvency is not stated to be a relevant factor. It is probably reasonable to draw the inference that where an insolvent transferor disposes of property at an undervalue he does so with intent to defraud, but the Law contains no presumption to that effect.

If a disposition is set aside,

(a) a transferee (e.g. trustee) who has acted in good faith has a first charge over the property for his entire costs properly incurred in defending the action (not limited to costs which might otherwise have been allowed by the Court);
(b) a beneficiary who has acted in good faith may retain any distribution properly made to him before the disposition is set aside.

Services Available

There are a number of trust companies in the Cayman Islands which provide trustee services. A schedule of fees can usually be obtained from each trust company.

Fees

The stamp duty on trusts and the registration and annual fees payable on Exempted Trusts are fixed and are not based on the asset value of the trusts.

We recommend that every individual/ entity should seek expert advice from an attorney-at-law or other professional in their country of domicile or residence prior to conducting any form of business in the Cayman Islands.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.