Sponsored by Walkers
Shelter from the storm
Protecting wealth and businesses using Cayman Islands trusts and foundation companies
he economic, political and social upheaval of 2020 has caused many families to reconsider their long-term financial plans. The desire to protect wealth and business assets, and to rationalise and consolidate management and administration in a well-regulated and safe place, has generated much new business for the Cayman Islands financial sector with a renewed movement of wealth into Cayman structures and, in some cases, the relocation of the family itself to the Islands.
Traditionally, asset protection meant one thing – limiting a creditor's access to a debtor's property by lawful means. Over the past twenty-five years however trust and foundation legislation in many offshore centres has become more sophisticated and now addresses a broad spectrum of concerns including protecting assets against fragmentation caused by forced heirship, disruption caused by litigation and family disputes, and unwanted publicity.
This article looks specifically at Cayman Islands trusts and foundation companies ("FCs")1 and the protection they offer.
1 Companies registered under Cayman's Foundations Companies Law, 2017
Divesting ownership, reserving control
Establishing a trust involves a party (the settlor) placing assets under the control of a trustee to hold for the benefit of certain persons (beneficiaries) or to carry out specific purposes. Forming an FC involves a party (often called the founder) incorporating a company which is registered as an FC and transferring to it property which is managed and applied to further the company's objects by a board of directors.
Much of the protection gained from a trust or an FC stems from the basic fact that the settlor or founder is no longer the legal owner of the property in the structure: title to the property is given away by the settlor to the trustee or the founder to the FC so that it no longer forms part of their personal estate. Subject to the principles discussed below, from the moment it is transferred the property is sheltered from the personal creditors of the settlor or founder and no longer subject to any mandatory inheritance rules or probate requirements which would otherwise apply when the settlor or founder dies.
Giving up legal title does not equate necessarily to losing all control over the property in the trust or FC or the ability to enjoy it. Cayman's trust law permits the reservation of wide powers by a settlor or a third party nominated by them, allowing the retention of extensive control over the management, investment and distribution of trust property. In the case of an FC, the founder may sit on the board of the company, or act as its supervisor, and in that capacity continue to make or influence decisions about how the property of the FC is managed and applied. In either case, the settlor or founder may be a beneficary of the structure.
The future of aviation is strictly tied to several factors
Protection against future creditors
A person with no existing or reasonably foreseeable personal claims against them may transfer property to the trustee of a Cayman trust or an FC safe in the knowledge that, if they are then made bankrupt, the property in the structure will be ring-fenced.
Cayman's principal creditor protection statute, the Fraudulent Dispositions Act, was enacted over thirty years ago. It sets out a two-pronged test which a creditor must satisfy in order to defeat a transfer of property to a trust or FC on the grounds that they have been defrauded by it. The creditor must show that (i) the transfer was made at an undervalue (it was either a gift or made at a significant discount) and (ii) the transferor acted with an intent to defraud (it was in the mind of the transferor that, in making the transfer, they were putting, or trying to put, assets beyond the creditor's reach). A six-year limitation period applies to any claim by a creditor.
Protection against foreign inheritance and other laws
A trust or FC can help to preserve family wealth and businesses for future generations and avoid fragmentation caused by the application of forced heirship on the death of the settlor or founder.
Mandatory inheritance rules apply in different forms in many civil law and Sharia countries: rules vary but, typically, an individual's ability to dispose of property freely on their death is restricted to a proportion of their estate only, with the remainder being divided between prescribed heirs. Clawback may apply to reclaim gifts made by the individual during their lifetime.
Cayman law, on the other hand, places very little restriction on an individual's freedom to dispose of their property as they think fit, both during their lifetime and upon death. This extends to transferring property to a trust or FC. Further, Cayman law will actively protect that transfer by means of statutory rules known as the "firewall". The firewall excludes the application of all foreign laws when determining matters such as the validity of a trust, the validity of a transfer of assets into a trust, the capacity of the transferor, and the administration of the trust by the trustee – all such questions are determined exclusively with reference to Cayman law. Similarly, in Cayman, no trust and no transfer of property to a trust will be set aside because the law of another country does not recognise the concept of trusts or because the arrangement contravenes that country's inheritance laws. The same principles apply to the transfer of property to an FC and to companies generally. Any judgment of a foreign court which is inconsistent with these principles will not be recognised or enforced by the courts of the Cayman Islands.
The practical effect of the firewall is that anyone seeking to have a transfer of assets into a Cayman trust or FC declared void because it breaches or denies their rights under the inheritance laws of a foreign country will have to argue the case before the Cayman court which will apply the principles of the firewall.
A note of caution. The physical location of property is a key factor in any asset protection structure: as far as possible, assets should be kept outside any jurisdiction where there is a significant risk of attack. Technically, Cayman's firewall applies wherever the property in the trust or FC property is situated. Nevertheless, if that property is located outside the Cayman Islands, and a successful claim is brought against the trust or FC in the courts of that jurisdiction, there may be little the trustee, the directors of the FC or the Cayman court can do to protect it.
The settlor of a Cayman Islands STAR trust1 may restrict or remove the enforcement rights and rights to information of any beneficiary of the trust, thus reducing the risk of unwanted expense, disruption and publicity caused by frivolous law suits brought by fractious beneficiaries.
Generally speaking, the beneficiary of a trust which is not a STAR trust has the right, albeit qualified, to receive information about the trust and its assets, and the legal standing to apply to the court to have the terms of the trust enforced. These rights are the means by which the beneficiary's interest in the trust is protected and the trustee held to account.
Cayman's STAR law, originally enacted in 1997, introduced a variation to this principle. STAR law permits the settlor of a trust to vest all enforcement and information rights (which would otherwise belong to the beneficiaries) in one or more "enforcers". These enforcers, who may or may not be beneficiaries, are the only persons who may exercise those rights and, consequently, it becomes possible for the settlor to withhold enforcement and information rights from any beneficiary whom he thinks may abuse them. The trustee is still fully accountable for its actions, but to the enforcer, not to the beneficiaries.
The situation is similar, possibly more robust, in relation to an FC: unless the constitution provides otherwise, a beneficiary will have no powers or rights relating to the FC, its management or its assets, and no rights to receive reports, accounts or any other information about the FC's business and affairs.
1A trust established under Part VIII – Special Trusts – Alternative Regime – of Cayman's Trusts Act
Avoiding unwanted publicity
Automatic exchange of information is now a fact of life. Nevertheless, trusts and FCs will still afford a high degree of privacy to families concerned about their safety and security were the extent of their personal wealth to become widely known.
The trust deed of a Cayman trust is a private document. Trust documents and the information they contain do not appear on any register in the Cayman Islands. The trustees are bound to keep the affairs of the trust and all personal information relating to the beneficiaries confidential. Under the STAR law it is possible even to restrict a beneficiary's access to trust documents and information.
The only publically available information in relation to an FC is its date of incorporation, the company number, whether it is active or dissolved, the address of it registered office and the name of the current directors. The constitutional documents are not available to the general public.
Every settlor's or founder's circumstances are different. This article outlines the statutory protection under Cayman law but more bespoke arrangements may be put in place to address specific situations. It does not consider the tax implications of any proposed wealth planning strategy and, in practice, clients will need to take specialist advice in their home jurisdiction and in the Cayman Islands in order to arrive at an appropriate plan.
190 Elgin Avenue
George Town, Grand Cayman KY1-9001
T +1 345 949 0100
F +1 345 949 7886