Cayman Islands trusts: introduction

Introduction to the Cayman Islands
Introduction to trusts
Cayman Islands trust system
Components of trusts

This article is part of a series of articles which aims to assist parties that are considering creating a trust in the Cayman Islands. It is intended to provide a summary of the main legal requirements and general principles applicable to the establishment and administration of trusts.

Introduction to the Cayman Islands

The Cayman Islands are a UK overseas territory. Although a governor is appointed by the United Kingdom, there is a large measure of internal self-government. The United Kingdom retains responsibility for internal security, defence and external affairs, and appoints certain public officers, including judges. The Cayman Islands have a well-developed and experienced court system, which has been tested with large trust and commercial cases. The government's policy is to allow litigants to appoint the counsel of their choice and, at any given time, a number of eminent Queen's counsel from London appear before the Grand Court of the Cayman Islands. The final court of appeal is the Privy Council in London.

Legal and accountancy firms in the Cayman Islands recruit professionals from top firms in all of the major financial centres, providing a high level of trust expertise. Many of the trust companies located in the Cayman Islands are subsidiaries of major Canadian, British and Swiss banks.

The Cayman Islands have excellent communications, information technology, automation and computerisation facilities, meaning that an onshore party will not suffer any delay as a result of dealing with an offshore service provider.

Introduction to trusts

A "trust" is a legally binding arrangement whereby a person (known as a "settlor") transfers assets to another person (known as a "trustee"), who is entrusted with legal title to the trust assets, not for their own benefit, but for the benefit of other persons (known as "beneficiaries"; this may include the settlor) or for a specified purpose.

The instructions from the settlor to the trustee as to the disposition of trust assets will normally be contained in a document called the "trust instrument". This is for the benefit of all parties as it will ensure that the settlor, the trustee and the beneficiaries know precisely what their respective rights and duties are. The trust instrument will usually provide that the trustee has the power to manage the trust assets in accordance with the terms of the trust instrument and the strict duties imposed on the trustee under statute.

In addition to the trust instrument, it is also usual for a settlor to indicate to the trustee their wishes as to the management and disposition of the trust fund in the future in a less formal manner. Their expression is often contained in a letter of wishes, which, although not legally binding, will generally be considered by the trustee to be of persuasive effect when performing their duties and, for example, determining to make a distribution out of the trust fund.

Cayman Islands trust system

The local legislation relating to trusts is largely the result of a close partnership between the government and the private sector. This has enabled the Cayman Islands to keep ahead of its competitors with modern, cutting-edge legislation. As noted above, Cayman law is derived from English common law. However, there are particular developments of the laws relating to trusts in the Cayman Islands that should be noted.

Although the trust as developed in England gave settlors great flexibility in deciding how trust property might be applied and enjoyed, certain limits were established, including the following:

• A trust, with minor exceptions, could only be established for the benefit of persons and not for the promotion or advancement of impersonal objectives.
• Beneficiaries were entitled to be informed about the state of the trust property and the way in which the trust was administered by the trustee and, if necessary, to commence court proceedings to protect their interests.
• The duration or life of the trust was limited.
• Trust property might, in some circumstances, be seized by the settlor's creditors, even if they were not a beneficiary, notwithstanding that they were solvent when the trust was created and that the trust had been created many years earlier.
• The extent to which the settlor might interfere in the administration of the trust once it was created was curtailed.

These restrictions have largely ceased to apply to Cayman trusts as a result of changes in the law adopted by the Cayman legislature:

• Trusts may now be established for the promotion or advancement of impersonal objectives.
• Beneficiaries' rights to information and to take court proceedings may be excluded.
• In some instances, no limit applies to the duration of a trust; where a limit still applies, a trust period of up to 150 years is now permitted.
• A solvent settlor may create a trust that cannot be attacked by their creditors after six years have expired, even though they are a beneficiary.
• A trust that takes effect during the settlor's lifetime will not be treated as a will or invalid testamentary disposition.
• A settlor can reserve extensive powers or interests to themselves or a protector or third party without jeopardising the integrity of the trust as an enforceable lifetime trust.

Legislation has strengthened Cayman trusts in other ways as well:

• The choice of Cayman law as the governing law is conclusive and any questions arising in connection with the trust will be determined according to Cayman law and the application of foreign law is excluded.
• It prohibits the enforcement of a foreign judgment regarding a Cayman trust on the basis that it contravenes forced heirship laws because the trust concept is not recognised in that jurisdiction.

The Cayman Islands have led the way among the offshore countries with their innovative legislation which makes them the most favourable destination for trusts. The Cayman Islands are not a party to the Hague Convention, which provides that parties thereto will recognise trusts which are more closely connected to states other than those chosen for the institution of the trust, the applicable law, the place of administration and the habitual residence of the trustees.

Components of trusts

Settlor
Once a trust is created, the settlor will have divested themselves of legal ownership of the trust assets. The settlor may be a beneficiary and, in certain circumstances, they may also act as a co-trustee. The settlor may also retain a degree of control over the trust, such as the power to approve distributions, the power to appoint and remove trustees and the power to revoke the trust. However, it is essential to the validity of a trust that the settlor actually dispossesses themselves of the trust assets; they may not, for example, simultaneously be a sole trustee and a sole beneficiary.

Trustee
Legal title to the trust assets is vested in the trustee under the obligations imposed by the trust and they are responsible for the administration of the trust. There is no need for the trustee to be a Cayman resident, although that will usually be more convenient where the trust is to operate in accordance with Cayman law.

The trustee's duties include, but are not limited to:

• the duty to administer the trust impartially in the interest of all the beneficiaries, with diligence and in good faith;
• the duty to keep trust accounts and accurate records of all distributions made and decisions taken in administering the trust;
• the duty to be actively administer the trust and to take their own decisions, not simply to await the instructions of others; and
• the duty to invest the trust fund with care, skill and caution in such investments as may be authorised.

Beneficiaries
The beneficiaries are the persons entitled to benefit from the assets held on trust. As stated above, the settlor may themselves be one of the beneficiaries. In order for a trust to be valid, there must generally be sufficient certainty as to the identity of the beneficiaries. An express power for the addition of further persons to the class of beneficiaries may, however, be included in the trust instrument. The beneficiaries may enjoy equal or unequal benefits, as the trust instrument prescribes or, in the case of a discretionary trust, as the trustee may determine.

It is also possible to include in the trust instrument a power to exclude beneficiaries from future benefit.

Within certain limits, the settlor may describe purposes for which the trust assets or their income is to be applied rather than individuals.

Trust fund
The assets constituting the trust fund may be of any type of movable or immovable property (except in the case of special trusts alternative regime trusts, which cannot hold land in the Cayman Islands directly). At any time after settlement on trust of the initial assets, further assets may be added. Indeed, a common arrangement is to establish a trust with a nominal initial amount and subsequently to add more substantial assets.

Protector
A settlor may include a "protector" in the structure of the trust. The function of a protector is usually to provide some indirect control over the trustee, particularly where the settlor has accepted advice that they should not attempt to exercise control themselves. So a trustee may be required to obtain the protector's consent before taking particular steps, or to act in some respects at the direction of the protector; the protector may be given power to remove and replace the trustee. The choice of a protector is as difficult a matter as the choice of a trustee; normally, the settlor will choose one or more individuals who enjoy their confidence, but that does not wholly overcome the problem of continuity after the death of those originally chosen.

For further information on this topic please contact Anthony Partridge, Giorgio Subiotto, Samantha Conolly or Gregory Haddow by telephone (+1 345 949 9876) or email ([email protected], [email protected], [email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.