There are a number of key reasons behind this resurgent interest in establishing a Cayman Islands trust, not least the robustness of the Law, the quality of the judiciary and the strength of the financial intermediaries who support the trust industry of in the Islands. By Judith Chatoo
According to official statistics published by the Cayman Islands General Registry in January 2021, the number of new trusts registered in the jurisdiction surged in 2020. Indeed, last year the number of new trusts reached its highest level since 2014, increasing by almost 30% compared to 2019. Given that trusts are not, in fact, generally required to register with the General Registrar, this figure likely underestimates the volume of activity in real terms but clearly gives a good indication of the continued growth of the industry in Cayman.
Security and the rule of law
The Cayman Islands Monetary Authority (CIMA) supervises and regulates providers of a wide range of financial services, including fiduciary, banking, insurance and investment management, while full compliance with the OECD makes the Cayman Islands a highly secure location - particularly for those persons and entities from countries or regions which are subject to socio-political unrest and uncertainty. Unsurprisingly, therefore, the Cayman Islands has become highly popular jurisdiction for the Far East, Middle East and LATAM markets.
The establishment of a trust is predicated on the pursuit of long term security and stability for wealth and assets. Location is key."
The financial services sector contributes around one third of the Cayman Islands GDP and it is well known for being the most popular destination for hedge funds globally and the registered home of 11,000 mutual funds. This popularity, and corresponding market maturity, has contributed to the development of a comprehensive and favourable regulatory environment for complementary segments of the finance sector, such as the fiduciary industry.
The establishment of a trust is predicated on the pursuit of long term security and stability for wealth and assets. Location is key to this pursuit and, as Saffery Champness found in its Future of Offshore report commissioned in 2020 the Cayman Islands remains a location of choice with a high-quality reputation amongst advisers and clients.
Its ‘firewall legislation' is seen as one of its major advantages, which helps insulate Cayman Law trusts from outside factors such as challenges under foreign law or judgements on the basis of forced heirship.
Meanwhile, the courts and judiciary have a pragmatic approach and are highly experienced in approving trustee decisions or resolving disputes. This has been tested in various complex scenarios involving trusts and heirship, including those with international and cultural complexities (such as the treatment of a trust in applying Shari'a law principles [AA v BB & Colin Shaw (as amicus curiae)].
Traditional discretionary trusts remain as popular as ever as a way to plan for succession and the transition of wealth between generations. Such a trust may also be formed for philanthropically reasons, asset protection or to generally manage the responsibility of wealth across a family.
The Cayman Islands also benefit from a flexible range of fiduciary options to the settlor (the person forming the trust) and their advisers.
Perhaps first and foremost amongst these is the STAR Trust, a structure unique to the Cayman Islands. Originally introduced into law in 1997 as a form of non-charitable purpose trust (which, unlike traditional trusts, has no beneficiaries but which is established and exists to serve a particular purpose) the STAR Trust legislation has been consolidated with and is now contained in Part VIII of the Trusts Law (2020 Revision).
The STAR Trust may have as its objects either a purpose or persons, of any kind or number. These may include charitable or non-charitable purposes. This kind of trust may be established to restrict the rights of beneficiaries when reason dictates, or it may be established with no beneficiaries at all. In place of these beneficiary rights, an enforcer is appointed to ensure the trustee acts according to the terms of the trust deed. This flexibility has made the STAR Trust a popular option, often where a hybrid solution is required, where the information rights of beneficiaries need to be restricted, or as a Special Purpose Vehicle (SPV) for international structured finance transactions. They are often used to hold the shares of an operating business to allow the directors to manage the business for a distinct period of time or limit the involvement of a trustee in the business allowing a settlor's long term plans to be achieved even after their death. While other Cayman Islands Law Trusts have a limited lifespan of 150 years, the STAR Trust can be established in perpetuity.
Wider options: Trusts, Companies and Foundations
While the STAR Trust provides unique flexibility, the Cayman Islands also provide for other potential structuring arrangements, which can in some cases be deployed to complement a STAR Trust.
Reserved Power Trusts remain very popular with clients who wish to retain an appropriate level of ‘control' over the assets they are gifting into trust or over the trustee themselves. For a client taking their first steps into trust vehicles this can be a reassuring feature for them.
Private Trust Companies (PTC) are another highly useful family governance-planning vehicle where family members can take board responsibilities and voting rights and/or shares can be assigned in line with a family constitution.
The Cayman Islands are also a favourable jurisdiction for the establishment of a more ‘simple' and easily recognisable Company structure.
The Cayman Companies Act is internationally recognised as a modern and robust framework for businesses which, again, provides for significant flexibility. Only one shareholder is required and there is no minimum capital requirement to form a company. While the company's constitutional documents must be registered with the General Registrar these are not publically available.
Cayman has committed to the Beneficial Ownership (Companies) Regulations (2019 Revision) which requires the majority of Cayman Islands companies to establish and maintain registers of beneficial ownership. These registers are not accessible by the general public but can be viewed by relevant authorities. Substance requirements are an important factor to consider when forming a Cayman company and where the company is undertaking certain activities it will need to have a material presence in Cayman.
Cayman company law advanced in 2017 with the introduction of the Foundations Companies Law, which allows for a foundation company to be established for a commercial, charitable/philanthropic or private purpose, or any combination of these. This legislation enables foundations to be rooted in company law but to function like a civil law foundation, opening up significant opportunities for those from civil law jurisdictions who are seeking succession and estate planning solutions.
Looking to the future, given the high regard in which the Cayman Islands are held around the world and the range and flexibility of options which its legal and regulatory system affords, we expect to see continued interest from families and their advisers in Cayman Law whether it be trust, company or foundation which is opted for as a solution for stable and effective wealth and asset management and secure succession planning.
Judith Chatoo is client director at Saffery Champness Registered Fiduciaries (Geneva) and member of the firm's Cayman Islands committee