Why create a trust (or foundation company) in the Cayman Islands
11 March 2020
The reasons for this can be broadly dealt with by answering two separate, but related, questions.
Why create a trust?
Trustee's core obligation
A trust creates a legally enforceable relationship, refined over hundreds of years, that the trustee holds the assets of the trust subject to certain fiduciary obligations. These include that the assets may only be utilised in the best interests of the objects of the trust and that, if the trustee does not comply with its obligations, recourse may be had to the courts for a remedy.
If it is necessary to seek a remedy from the courts, there is an extensive body of binding and persuasive international case law such that settlors, and others who must apply trust law, have an invaluable resource in terms of how trust law is likely to be interpreted by the courts and the certainty that goes hand in hand with this.
In order for a trust to be valid, it must, as a minimum, create an "irreducible core of obligations" and its provisions, property and objects must be sufficiently certain. However, beyond that, a trust is otherwise an extremely flexible planning tool.
Central organization of global assets
The increasing use of international trust planning has closely mirrored the increasing internationalization of high net worth families who often have assets in multiple jurisdictions. A trust located in a suitable jurisdiction can serve as the ideal way of holding such assets, administering them holistically and avoiding, for example, multiple probate applications upon the death of the settlor.
Seamless succession planning
Trusts facilitate a smooth transition of family assets including by the settlor being involved in succession planning arrangements during the settlor's lifetime rather than simply leaving all his assets to the next generation under a will or other such testamentary arrangement. This is often crucial in the case of a family business where the avoidance of disruptions in management and control can be fundamental to the integrity and value of the business.
Protection from bankruptcy or insolvency
Upon a settlor creating a trust, the legal and beneficial interest in the assets of the trust are transferred such that the legal title vests in the trustee and the beneficiaries accrue beneficial interests. Subject to applicable bankruptcy and similar laws, this may mean that such assets are no longer vulnerable in a bankruptcy or insolvency situation. In a private trust context, this enables settlors to create a "nest egg" to lessen the impact of some rainy day event. In a commercial trust context, this permits, as an example, one party to a transaction to hold the assets which are the subject of the transaction such that other parties to the transaction have the beneficial interests. This may then avoid those assets falling into the hands of the holding party's creditors, should it be declared insolvent.
Protection during divorce
Although trusts are often established to provide for a spouse and children, should a marital dispute arise, they will also often protect the assets from claims by a former spouse of the settlor or adult children.
Young and spendthrift descendants
It is generally unwise for family members to gain ownership or control of substantial assets at too young an age and it is not uncommon for a member of a wealthy family to develop spendthrift tendencies. Trusts are frequently used as a tool for delaying ownership and control and appropriately managing investments in the interim.
Understandably, individuals will wish to have an appropriate level of privacy concerning their financial and other such affairs. In the case of high net worth persons, the motivation may extend to such concerns as the avoidance of media attention and that of potential kidnappers. Indeed, it is not uncommon for offshore trusts to contain specific provisions to deal with kidnap situations.
Potential tax minimisation
If a tax benefit is achieved, this will usually be in either of one of two ways. It may be as a result of the relevant onshore jurisdiction's laws actually permitting a degree of minimization of tax by establishing an offshore trust. The alternative is frequently that the trust is, in actuality, tax neutral so that, typically, the beneficiaries will pay tax in the jurisdictions in which they are located and the trust simply either avoids additional/double taxation or it does not achieve anything that could not be achieved onshore.
Trusts are increasingly used in commercial situations including (but certainly not limited to) pension trusts, unit trusts, employee share options schemes, share voting trusts, trusts for use in corporate/aircraft finance transactions, trusts to hold the voting shares of corporate funds to avoid consolidation and other such issues (the voting shares of many Cayman registered corporate mutual funds are held in this way) and trusts in the nature of escrow arrangements.
Trusts are frequently used for charitable and philanthropic purposes either solely for such purposes or as part of a family's wider succession planning.
Why create a trust in the Cayman Islands?
Politically and economically stable
Frequently, settlors of trusts come from jurisdictions lacking political and economic stability and rule of law such that, if assets were held in their home jurisdictions, they would be at risk. Obviously, it could potentially be counterproductive to establish a trust in a politically unstable jurisdiction or one in which, as an example, a change in government could result in punitive taxes being imposed on the wealthy and their attempts to preserve their wealth. Cayman is both politically stable and very unlikely to impose such taxes.
Developed regulatory framework
Unlike many other jurisdictions, Cayman imposes stringent legal requirements on trust companies which offer trust services to the public, both in terms of obtaining the necessary licence to do so, including being suitably insured, and as to ongoing monitoring. Accordingly, those involved in establishing Cayman trust structures can be assured that the trustee will properly carry out its role as such and that, in the unlikely event that any issues arise with the trust company itself, there will be an appropriate regulatory framework in place to deal with this.
Stringent money laundering controls
There is, occasionally, a misconception amongst the less well informed that it would, in some way, be beneficial for Cayman to do less than its fair share in implementing measures to combat the laundering of the proceeds of crime and the funding of terrorism. In fact, the reverse is true and Cayman has had robust laws and regulations in place to implement such measures for decades. This has done much to enhance Cayman's reputation and thus to assist it in attracting welcome high quality business (and to dissuade unwelcome business). Such a sound reputation can be particularly important to high net worth high profile families.
Availability of options
Cayman has been at the cutting edge of developments in offshore trust (and now foundation company) legislation, usually in response to the needs of international trust advisors and their clients. The equivalents of Cayman's exempted trusts, STAR trusts, reserved powers trusts, foreign element, asset protection and confidentiality laws and legislation are, by and large, simply unavailable in most onshore jurisdictions.
Quality and experience of professionals
Over the decades, Cayman has benefited from a snowball effect as a result of being, and continuing to be, one of the leaders in developing its financial services legislation. As a result, Cayman has attracted many of the leading international banks, trust companies, accountancy firms and other such financial service providers and the local law firms (most being international) have been able to attract a high number of very experienced and qualified international lawyers highly specialised in international wealth structuring. It is fair to say that Cayman competes with (indeed surpasses) most of the major onshore financial centres when it comes to the type of international services provided and the quality of the professionals providing such services.
Internationally recognised forum for resolving trust disputes
The corollary of having such an established trust industry is that many of the leading international trust cases have been litigated in Cayman; its courts system is an internationally recognised forum for the resolution of such disputes. Indeed, it is not unknown for trusts to be re-domiciled to Cayman precisely because of the possibility of a dispute and the need to settle it as appropriately and efficiently as possible.
It is recognised that, for individuals from certain (usually civil law) jurisdictions, trusts may be unfamiliar or give rise to tax or reporting issues. As a result, in 2017, Cayman introduced a unique form of company intended to provide all the above advantages of a trust but in a corporate vehicle.