The attraction of the trust concept is plain: The trust is the most flexible financial instrument for making estate planning arrangements, short term or long term, free from the restrictions of the legislation of the domicile of the settlor. Whatever the individual's wishes may be for the future ownership, management, and enjoyment of his property, they can almost certainly be achieved by using a trust.
The attraction of Cayman as a jurisdiction in which to establish a trust is also plain: In recent years, as the popularity of the trust concept has grown worldwide, so have the cadres of experts in trust formation and administration in the Cayman Islands. Consequently, that expertise and, more importantly, the legislation which has grown out of it, have attracted more trust business to the Islands to the extent that there are now more trust assets under management in the Cayman Islands than there are deposits in Cayman banks.
The increasing complexity of the investment world and the difficulty of preserving wealth have made the trust particularly important as a means by which the individual can provide financial security for his family after his death even though they may not be knowledgeable in investment matters.
In recent years, institutional interest in the offshore trust has also increased. The trust fits very well into the current preoccupation of financial institutions with the "High Net Worth Individual." There is no better way of retaining the HNWI's investment business than to show him the virtues of the trust concept and administer a trust for him and his family.
The trust concept has never been static - particularly in the Cayman Islands. It has continued to evolve as new legislation is passed. The reason the offshore trust is enjoying a renaissance is that it has acquired some important new features to suit the environment in which it thrives: The Cayman Islands has played the leading role in this renaissance. Many of the practices and techniques now generally accepted by the offshore trust community were developed here.
In 1987 the Cayman Islands enacted the Trusts (Foreign Element) Law to provide a comprehensive set of conflict-of-law rules, and in 1989, the Fraudulent Dispositions Law provided a comprehensive framework to deal with the uncertainties of creditors' claims and essential protection for the trustee which in turn encouraged the defence of the trust if challenged.
Consider for a moment the complexity of some of these matters:
The settlor may or may not be a national, domiciliary, and resident of a single country. The trust assets may be situated in several different countries. There may be a protector or management committee in yet another country. The trust documentation and funding may have been handled somewhere else. Presumably the trust administration is handled for the most part in the offshore centre, but sometimes it is handled elsewhere. So when some trust-related question has to be decided, the Cayman Islands court must first decide which country's law governs the question. It does so by applying its own conflict-of-law rules. The rules inherited from England by most offshore centres were unsatisfactory not because what they said was wrong, but because no one could be quite sure what they did say--there have been so few British cases dealing with this branch of law. Some of the cases were potentially unhelpful.
Judging by the outcome of litigation to date, however, Cayman's Trusts (Foreign Element) Law 1987 and Fraudulent Dispositions Law 1989 have achieved the desired result in resolving these issues. In fact, many other offshore centres have now followed Cayman's lead with some simply copying the drafting of Cayman's legislative language.
There are still some offshore centres that have not gotten their houses in order. A number of centres (but notably not Cayman) have simply followed England into ratification of the Hague Convention on Trusts; and though the Convention is admirable in many respects, it falls a long way short of providing an adequate framework for offshore trusts and may be potentially damaging to the health of many.
Twenty years ago the offshore trust community consisted principally of institutions and professionals from England and a few other major common law countries such as Canada and Australia, but the offshore trust is now being used increasingly by people from places outside the major common law countries. Some years ago Hong Kong residents, worried about their future, provided a shot in the arm for the offshore trust community. They also brought an infusion of new ideas, since much of the Hong Kong business was planned by American lawyers. Now the offshore trust catchment area is nearly worldwide, even including regions where the trust concept is completely alien - Continental Europe, Latin America, and the Islamic world.
But the renaissance is not just a matter of popularity. The offshore trust community has reacted positively to a number of challenges and, as a result, has greatly increased its capability and sophistication. One such challenge has been the realisation that offshore trusts are different in important respects from domestic trusts. The laws and practices inherited from England are not adequate in all respects for an offshore trust, such as the conflict-of-law problems described above.
A further challenge that has been met in the Cayman Islands concerns the very different attitudes, expectations, and problems of the new breed of settlor found outside the major common law countries. For many, tax considerations are much less dominant than they once were. The offshore trust is no longer seen simply as a tax avoidance technique but rather as a vehicle to preserve or enhance wealth and to provide for its efficient transmission and management. Trust planning has become at least as important as tax planning as it is critically important to have available expert personnel to provide adequate comfort to settlors who may be unfamiliar with the concept of the trust but who require its significant benefits.
The Cayman Islands have continued to innovate solutions. In recent times an entirely novel control technique has become increasingly popular - to establish a private trustee company. The control arrangements are built in at the company level. The trust itself remains uncomplicated by protectors, management committees, or other supernumeraries. Day-to-day management of the private trust company (and the trust) is generally provided by a professional trustee company. The private trustee company approach has a number of real advantages and is likely to be the best solution, especially for many large family trusts.
Perhaps the sharpest challenge to be faced by the Cayman Islands trust community is the propensity of the settlor's children to attack the trust once the settlor has died.
The motivation is clear enough - the child's interest in the trust may be less than his interest in the estate. But this propensity is much more marked amongst families from civil law countries because most civil law systems have the concept of forced heirship entitling children to receive the bulk of their parents' estates immediately and without strings, regardless of the child's needs and regardless of the parents' wishes or better judgment.
Some of these disputes have led to litigation, some on a very large scale involving proceedings in the courts of several countries.
The possibility of disputes of this sort will ensure the continued growth of the Cayman Islands as the well-advised settlor is obliged to select the jurisdiction with adequate infrastructure and professional advice thereby ensuring that the initial structuring and administration are such that the integrity of the trust is established and maintained. In this respect, the Cayman Islands distinguish themselves from other offshore jurisdictions.
If past can be considered prologue, it can be expected that the trust concept will be with us for the foreseeable future. After all, it has hundreds of years of history and tradition behind it, and it has proven its adaptability and flexibility as circumstances and legislation continue to change in jurisdictions throughout the financial community.
Cayman is justifiably proud of the leading role it has played in the recent renaissance of the offshore trust and is continually reviewing its enabling legislation to serve better both the high net worth individual as well as institutions which could benefit by the formation of an offshore trust.
- The Cayman Islands are a worldwide centre for the establishment of offshore trusts.
- Legislation governing offshore trusts in Cayman is widely believed to be the best-crafted (and most often duplicated) in the world.
- The Cayman Islands are not a signatory to the Hague Convention on Trusts, thereby assuring autonomy and independence in tailoring legislation to local needs and customs.
- Cayman is a leading participant in the worldwide renaissance of offshore trusts.
- Private sector partnership with Government and the Financial Secretary ensure that trust legislation is up to date and responsive to the needs of a changing environment.
- A large and sophisticated community of attorneys and other experts on offshore trusts is resident on the Island.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information on the above please contact Jacqui Crane.