The greatly increased risk of liability for negligence among professional persons and the related concern about the current cost and availability of professional indemnity insurance have led more and more clients and their advisers to consider the possibility of creating settlements abroad for asset protection purposes. This trend has been enhanced not only by the far more litigious climate that now exists in the business and professional world, especially in the United States of America and certain other countries, but also as a result of legal restrictions in the client's domestic jurisdiction which have the effect of retrospectively invalidating pre-bankruptcy settlements of property if such transactions are adjudged as having been intended to defeat creditors. It is often considerations of these kinds arising under a client's domestic law which cause clients to contemplate some form of foreign trust whose assets cannot be reached by creditors in the event of his insolvency.
ADVANTAGES OF ESTABLISHING AN ASSET
PROTECTION TRUST IN THE CAYMAN ISLANDS
1. British colony with no independence movement and which is politically stable.
2. Excellent professional and banking services, including a wide range of banks and trust companies to choose from for the provision of trustee services.
3. No personal or corporate taxes nor any estate or inheritance taxes.
4. No exchange control regulations.
5. Flexible trust law based upon the trust law of England but with important differences with regard to, among other things, protection from creditors.
6. Secrecy. The laws of the Cayman islands have been formulated to maintain the utmost secrecy.
ESSENTIAL INGREDIENTS OF AN OFFSHORE ASSET PROTECTION TRUST
In establishing an offshore trust for asset protection purposes, it is essential that the trust is governed by the offshore law, that the assets are themselves offshore and those who control the operation of the trust (and the appointment of trustees) are similarly offshore.
In the event that one of these factors is missing, the trust will be vulnerable to attack in the domestic courts by the settlor's trustee in bankruptcy and perhaps his creditors. If, for example, the trust assets are located in the domestic jurisdiction, the initial transfer of such assets to the trustee may be avoided under local insolvency laws and the trustee in bankruptcy may be able to obtain whatever orders are required from the domestic courts to seize or realize such assets. A foreign governing law clause within the trust instrument itself or the willingness of offshore trustees to resist any such proceedings are unlikely to be of much practical effect since the trust assets themselves will be subject to the domestic courts territorial jurisdiction. Likewise, if the trust assets are offshore but the trustee is not, the trustee may find itself the subject of a court order obtained in the domestic courts requiring that trust assets be repatriated.
It follows from the above that any trust assets transferred back to the jurisdiction of the settlor's bankruptcy, whether for his own benefit or for the benefit of other discretionary beneficiaries, would also be at risk of seizure by the trustee in bankruptcy and creditors. Ideally therefore, an asset protection trust is best suited for property which is not only offshore but can actually be enjoyed offshore without there being any need to make distributions back to the home jurisdiction.
NEED FOR DOMESTIC ADVICE
It is of course important that, as a preliminary step, the intending settlor is advised as to what consequences may result in his own jurisdiction from establishing an asset protection trust offshore. For instance, are there any adverse tax consequences associated with creating the trust? The settlor will also need to know the extent to which the trust will be effective against a trustee in bankruptcy under local law and whether any creditor may have grounds for an action in conspiracy and, if so, against whom. Care should also be taken to ensure that no criminal offence will be committed under local laws by transferring assets offshore or by setting up the trust in the circumstances then prevailing. We recommend therefore that legal counsel in the client's country of residence be consulted at an early stage to ascertain the legal and tax implications of the client's proposals.
PRINCIPAL CAYMAN ISLANDS TRUST LEGISLATION
The principal trust legislation in the Cayman Islands is the Trust Law (Revised) which was passed in 1967 as a consolidating statute and has provisions which are broadly similar to English trust legislation. There are however certain significant differences in the trust law of England and the Cayman Islands, particularly in the legislation concerning dispositions which are prejudicial to creditors. The Cayman Islands rules in this regard are to be found partly in the Fraudulent Dispositions Law 1989 and partly in the Bankruptcy Law (Revised).
The Fraudulent Dispositions Law 1989 (as amended) provides that any disposition of property made with an intent to defraud and at an undervalue shall be voidable at the instance of a creditor thereby prejudiced, but only to the extent of such creditor's prejudice and only if proceedings are commenced within six years of the disposition. The burden of establishing an intent to defraud is placed upon the creditor seeking to set aside the disposition. An "intent to defraud" means an intention of a transferor wilfully to defeat an obligation owed to a creditor.
This requires a creditor to be in existence at the time of the transfer (the protection does not apply to future creditors) and the transferor to have notice of his claim. An "obligation" for this purpose means an obligation or liability (which shall include a contingent liability) which existed on or prior to the date of a relevant disposition and of which the transferor had notice. There are also express provisions contained in this law protecting the interests of transferees in good faith and of any beneficiary who has not acted in bad faith in receiving a distribution from the trust.
The Trusts (Foreign Element) Law 1987 provides that if Cayman Islands law is expressed to be the governing law of a trust, such choice of law will be upheld regardless of any other circumstances. Accordingly, all questions arising in regard to any such trust, such as any aspect of the validity of the trust or its administration, will be determined in accordance with Cayman Islands law. This is obviously important because it means that a settlor is free to choose Cayman Islands law as the governing law of his trust and that such decision may not be over-turned on other grounds. The 1987 Law further provides that no trust governed by Cayman Islands law may be set aside by reason that the laws of any foreign jurisdiction do not recognise the trust concept or because the trust contravenes foreign forced heirship laws.
ESTABLISHMENT OF TRUST
In order to establish a trust in the Cayman Islands, it is necessary to settle the form of the trust instrument with the chosen trustee and then to transfer the relevant assets to the trustee to be held on the terms thereof. The requisite formalities associated with any such transfer of assets will of course depend upon the nature and location of the assets in question. The creation of a trust is usually a private transaction involving no filing of documents or information with any governmental body. Although stamp duty of US$50 will be payable on the trust deed itself, there should, in the ordinary course of events, be no other taxes or government fees arising on the formation of a trust or on its administration and distributions.
Form of Settlement:
The form of trust most ideally suited for asset protection purposes is the discretionary trust with provision for accumulation of income. The settlor may of course be included as one of the beneficiaries. There are dangers however, from an asset protection perspective, associated with giving the settlor any kind of life interest in the trust or power over its administration such as a power to replace trustees or a power of revocation. The appointment of a trust protector and/or the preparation of a so-called "letter of wishes" may be helpful however in providing comfort to a settlor who is otherwise concerned that his enjoyment of trust assets, under a purely discretionary trust, will be entirely dependent upon the trustee administering the trust in accordance with his initial expectations. Whether the trust company's 'standard form' trust deed is appropriate for a particular trust or whether a more 'tailored' document is required will of course depend upon individual circumstances.
Choice of Trustee:
Ordinarily, a trust company is appointed as the sole trustee and the principal question is usually whether to appoint a trust company affiliated to a major international bank or, alternatively, to opt for a smaller trust company under local ownership. We would of course be pleased to offer guidance in this regard. In most cases however, we would recommend that the client meets representatives of several trust companies before coming to a final decision.
Certificate of Solvency:
Before agreeing to act, any Cayman Islands trust company is likely to require references on the client concerned and a suitable affidavit concerning solvency, percentage of assets being introduced to the trust and perhaps an ancillary statement that there is no outstanding or pending litigation. Further, a statement of the client's assets and liabilities is also likely to be required certified by a firm of chartered accountants.
The issues involved in planning any offshore trust are often varied and complex and will of course depend greatly upon a client's particular circumstances and objectives. This memorandum is intended to provide preliminary guidance only on the key considerations associated with any decision to establish an asset protection trust in the Cayman Islands and should not be regarded therefore as a definitive or exhaustive guide on the subject.
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.