The number of persons who seek an offshore solution to their financial requirements continues to grow and with this growth has come not only an increase in the number and quality of service providers but also an upturn in the number of offshore centres from where financial services can be provided.
Competition of this nature is of course welcome as it has provided all of the offshore centres (as well as the various service providers) with an ideal opportunity to take a close look at the features and benefits which they have to offer clients and how those features and benefits compare with rival locations.
In this article I shall cover why a person might want to choose the Cayman Islands as the centre in which to create and base his/her offshore trust.
The Legal System
The Cayman Islands are a British dependent territory and although the British Parliament retains the right to pass legislation we have our own Legislative Assembly which generally decides on the laws which will prevail here.
Our laws are based on English common law and although many of our trust statutes are similar in nature to those which are found in the United Kingdom we have made certain changes to some of the more 'traditional' trust provisions. We believe that these changes not only reflect the changing needs of the market place but have also served to enhance the appeal and uses of the common law trust as a financial planning vehicle for international clients.
Let us now look at some of the enhancements to the trust laws which the Cayman Islands' draftsmen have implemented.
The Perpetuity Period
It is a widely accepted principle that assets can't be held in trust indefinitely and the perpetuity period (as it is often termed) will set out just how long assets can be retained in a private trust without infringing this principle.
In many locations the perpetuity period (or the maximum trust duration period as it is sometimes referred to) will be a life in being plus 21 years or in some cases a term of years not exceeding 80 or 100. However, under the Perpetuities Law 1995 the perpetuity period of a Cayman Islands trust can be as long as 150 years.
Accumulation of Income
Trust income can be accumulated (added to the capital) for the duration of a Cayman Islands trust. In some jurisdictions there may be a restriction in place preventing income being accumulated beyond say, 21 years from the creation of the trust.
The Fraudulent Dispositions Law 1989 provides the settlors of a Cayman Islands trust with an element of protection against claims which may be made against them by future or unknown creditors. A simple enough enhancement but one which has sparked an enormous amount of debate since the enactment of this Law.
Before we look at what this Law attempted to do I should perhaps emphasise what it was NOT designed to do. In simple terms, this Law was not intended to be used as a means to defeat the claims of, or hide assets from, the current or anticipated creditors of a settlor. The intention of this law was to remove some of the doubt which surrounds the validity of a transfer of property into a trust by the settlor. Let me explain this in more detail.
Under the laws of some jurisdictions, a transfer into a trust can be set aside if a creditor makes a claim against the settlor or if the settlor becomes bankrupt within a certain period of time. If a claim is made within that time frame the trust could be declared invalid, even if the claim was less than the amount placed into the trust. This could therefore mean that the settlor of a trust might have to wait as long as 10 years before he is sure that the transfer which he made into his trust will remain unchallenged and that his trust will be considered valid. In addition, if a claim was made the settlor would have to prove he was not attempting to defraud the creditor making the claim.
Under the Fraudulent Dispositions Law 1989 much of the doubt surrounding the settlor was removed yet at the same time the legislation also respected the rights of persons to make a claim after property had been transferred into trust. Basically, the onus of proving the settlor was attempting to defeat the creditor passes to the creditor concerned. In addition, the creditor must demonstrate that he/she had suffered a loss as a result of the transfer and he/she must also bring proceedings in the Cayman Islands within 6 years of the date of the transfer. If the creditor misses the 6 year period his claim will not be recognised in the Cayman Islands.
A number of offshore centres have modelled their asset protection laws (which these provisions are often termed) on our law and some offer even greater protection against claimants. However, we in the Cayman Islands believe that our legislation provides an acceptable mix of protection both for the settlor as well as for the legitimate claimant.
Forced Heirship Protection
Under the Trusts (Foreign Element Law) 1989, which is now consolidated under the Trusts Law 1996, the position relating to foreign individuals who settle a Cayman Islands trust was clarified. In general terms, if a settlor of a Cayman Islands trust chooses the law of these Islands to be the proper law of their trust our local law will govern such matters as the capacity of the settlor to create the trust, the validity of the trust as well as the powers and provisions which are contained in the trust deed.
A foreign judgement would not, therefore, be recognised if it attempted to attack the settlor, the trustee or the trust property on any of the aforementioned grounds.
These provisions can be particularly appealing to settlors from civil law countries which recognise the claims of certain family members against a person's property. The family members who have these rights under local law are often referred to as forced heirs.
In addition to offering what we call an 'Ordinary Trust', which is the basic common law trust offered by other centres, we also have Exempted Trusts which are unique to our shores. There are 2 types of exempted trust which are available.
For both types the Registrar of Trusts has to be satisfied that none of the beneficiaries will or can be resident or domiciled in the Cayman Islands. The Registrar must also be sent a copy of the trust deed and usually copies of trust accounts plus any other information which the Registrar may feel is appropriate. In return for this, and payment of a registration fee of US$500 and an annual fee of US$120 the trust will receive an undertaking from the Governor of the Cayman Islands that it will be exempt from local tax (if any should be introduced) for up to 50 years.
However, a Section 79 Exempted Trust (as it is commonly called) extends the principle of tax exemption. The parties of a proposed trust (which would usually be the trustees and the settlor) must submit details to the Registrar of Trusts before the trust is created and if the application is accepted, the rights and remedies which would otherwise pass to the beneficiaries of the trust would instead pass to the Registrar of Trusts. This would mean that the beneficiaries could not enforce the terms of the trust and would generally have no right to receive information relating to the trust or the trust property.
Although not part of our trust statutes, the Confidential Relationship (Preservation) Law is worthy of mention as an attraction of the Cayman Islands as a centre in which to create a trust as this Law places severe penalties on those practitioners who disclose information relating to their clients to outside parties. Most centres offer confidentiality, but in the Cayman Islands we have specific legislation in place which all but guarantees it.
However, that is not to say that confidential information can't or won't be released in certain circumstances. All service providers have a legal obligation to report situations where clients are using a trust (or any other type of entity) to launder money or traffic drugs and the protection afforded by our confidentiality provisions will not (and were never intended to) extend to such illegal activities.
Unlike many offshore centres which are low tax centres, the Cayman Islands is a no tax centre. The income and capital gains of a local trust will not, therefore, suffer any local taxation. However, transfers into and distributions out of a Cayman Islands trust may create taxation implications for the transferee or the beneficiary concerned in their country of residence.
Regulation of Trustees
If a corporate entity wishes to provide trust services it must apply for a licence from the Inspector of Financial Services in accordance with the provisions of the Banks and Trust Companies Law. The regulations apply a 'fit and proper' test to such entities as well as to the senior officials of such entities, thus providing a level of control over trust companies which doesn't exist in a number of other offshore centres.
Although not on the statute books as yet, we should soon be able to provide non-charitable Cayman Islands purpose trusts.
The Trust Industry in the Cayman Islands
If you take a look at the various business directories in this Yearbook and read down the list of the names of the organisations and practices which are present in the Cayman Islands one word should come to mind, and that word is 'quality'. The Cayman Islands has a first class trust industry with first class service providers and practitioners.
Another reason why the Cayman Islands should be the first choice for trust business.
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.