31 Aug 2020

An Executive Summary of Cayman Islands Trusts

The establishment of trusts is governed by the Trusts Law (the "Trusts law"), the Fraudulent Dispositions Law and the Perpetuities Law  of the Cayman Islands.  This legislation, in particular the Fraudulent Dispositions Law, makes the Cayman Islands a most attractive jurisdiction in which to establish trusts for asset protection.

Settlors from countries with forced heirship rules will find the provisions of the Cayman Trusts Law of use in that it provides that Cayman Law overrides the law of a settlor's jurisdiction, allowing forced heirship rules to be avoided.

The rule against perpetuities was superseded in 1995 which extended the common law period of "lives in being plus 21 years" to a fixed period of 150 years in most cases, and the STAR Trusts regime allows purpose trusts with no perpetuity period allowing a trust to last as long as is desired, allowing for ‘dynastic’ type arrangements. 

Cayman Islands trusts can be established by persons in any part of the world with assets in any part of the world and in any currency.  No limits are placed on accumulation of income from the capital of the trust for up to the length of the period of the trust. 

Types of Trusts

There are two basic types of trusts in the Cayman Islands:

  1. Exempted Trusts
  2. Ordinary Trusts
     

Exempted trusts receive a tax-free guarantee from the Government for up to 50 years.  Exempted trusts must be registered with the Registrar of Trusts, pay a registration fee and annual fees to the Registrar.  The trust deed must set out in detail the provisions of the trust.  While there are a number of standard provisions which are normally included, most trust provisions vary widely depending on circumstances and should be drafted with the benefit of legal advice.  We at IMS are happy to work with our clients’ choice of legal and other professional advisors and have good working relationship with all professional services firms of the island and can make recommendations if required. 

For some items, we require the instructions of the settlor and/or provider of the funds/assets:

  • Will the trust be ordinary or exempted? 
  • Will the trust be established by a grantor (known as a settlor) settling funds or by declaration of trust on the part of the trustee? 
  • Will the trust be discretionary or specific?  If specific, the trust deed must detail the names and addresses of the beneficiaries as well as their interests and times and methods of benefiting.  If discretionary, the trust will only list the names and addresses of the beneficiaries and leave all matters concerning payment to the beneficiaries to the discretion of the trustee. 
  • Will the trust period be fixed?  The period can be fixed for any period providing it does not exceed the time allowed under the Perpetuities Law (150 years) in the case of an ordinary trust or exempted trust. 
  • What assets will be settled on the trust? This can be a small sum, with further funds or assets being added at a later date. 
  • Will the trust be irrevocable or revocable?  For example it could be revocable for a number of years (or during the life of an individual or individuals) then irrevocable or vice versa or it could be irrevocable or revocable for the whole trust period.  If revocable, by whom or under what circumstances can it be revoked? 
  • Who will be trustee(s)?  Successor Trustee(s)?  Who can appoint and remove trustee(s)?
  • What will the name of the trust be?
  • What type of investments can the trust hold?  Are any limitations to be placed on investments?
  • Will there be an investment adviser? 
  • Will the settlor reserve (or grant to a third party) any powers?  Certain powers may be reserved without jeopardising the validity of the trust.  These include the power to revoke, vary or amend the trust; appoint income or capital; give binding directions to the trustee in relation to the sale or purchase of assets; appointment and/or removal of beneficiaries, trustees and protectors; change the governing law of the trust or to restrict the exercise of certain powers in the trust deed.  Advice should be taken by a settlor before reserving such powers, as it may have undesirable tax consequences.
  • Will a protector be appointed? Protectors should preferably have no beneficial interest under the trust (although a settlor is often the protector during his/her lifetime).  A protector is often appointed to assist the trustee in the exercise of its discretion or to perform other functions in relation to the administration of the trust (such as appointment and removal of trustee, approving distribution of assets etc.).  Successor protector provisions should also be included in the deed. 
  • Will the settlor provide a ‘letter of wishes’ to the trustee expressing wishes as to the exercise of the trustee's discretions?  These are not considered to be binding on a trustee, but are seen as persuasive, so such letters should be as clear and unambiguous as possible.
     

A special form of trust which has no perpetuity period is possibly the most popular and flexible trust available in the Cayman Islands is the non-charitable purpose trust known as a ‘STAR’ trust.  These are established for non-charitable purposes or beneficiaries (or a combination) provided that the purposes are lawful and not contrary to public policy.  All STAR trusts must have an Enforcer, who has the right and power of enforcement of the trust and rights to information, which are removed from the beneficiaries (if any) and are vested in the Enforcer.


About the Author
Gary Butler is the Managing Director and an independent fund director at IMS in the Cayman Islands and he can be contacted at gbutler@ims.ky.

IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.

Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.