Cayman Islands: The Trustees’ Perspective: When The Trust Doesn’t Work!

Last Updated: 2 November 2011
Article by Sophia Harris

This article first published in the October issue of Tax Planning International Review published by BNA International.

The following article looks at the trustees role in administering a trust, looking at practical tax and other legal issues that can arise where trustees do not have sufficient powers or face unforeseen circumstances, with a focus on the Cayman Islands and UK case law and legislation.

I. Introduction

The Trustees of a trust owe fiduciary duties and obligations to the beneficiaries of the trust, or in the case of a STAR Trust, to ensure that they meet the objectives of the trust. During the term of the trust, it is important that the trustees have sufficient powers and that the terms of the trust sufficiently empower the trustees to meet their obligations. But what happens if the trust doesn't have such powers? What happens when the trustees face difficulties in the management or administration of the trust? For instance, what should trustees do in circumstances where the current structure of the trust, or other unforeseen circumstances, may have devastating tax consequences for the beneficiaries of the trust? Or worst of all, where the decision of the trustee in administering the trust to make it more tax efficient has dire consequences?

II. Varying a trust

A. Case law

It is interesting to note that the most common reason for varying a trust is to mitigate the potential liability of beneficiaries to pay taxes. Case law still suggests that the fiduciary duties of the trustees to the beneficiaries include mitigation of their tax liabilities. Applications to the courts to restructure the trust accordingly, even where the impact of taxation is due to a few of the beneficiaries of the trust, have been found to be "expedient in the interests of the trust as a whole..."1 As the trustees duty to take relevant matters into account is a fiduciary duty, fiscal considerations will often be among the relevant matters which ought to be taken into account in making decisions affecting the trust. In this area of law the idea of mitigating tax implications is understood and expected and viewed as a relevant consideration of the trustees, at least in so far as the Courts in England are concerned. (This view is in contrast to the debate in the United States of what constitutes tax avoidance versus tax evasion, where there seems to be no distinction and both avoidance and evasion may be viewed as "unpatriotic" and illegal).

The trustees' first course of action would be to identify the particular mischief that they are trying to remedy. This will determine what remedy is available to them, whether under the terms of the trust deed or by court order.

The trust deed itself might provide the trustees with a power to vary the terms of the trust. However, case law makes it clear that such a power to vary the terms of a trust must be exercised for the purposes for which it was granted and not beyond the reasonable expectations of the parties2 and more importantly, the settlor. Making such a decision could prove difficult for the trustees and they would be forgiven if they chose not to exercise such a discretionary power without first seeking appropriate counsel.

Where there is doubt or where the variation appears to not sufficiently fall within the variation power set out in the trust deed, seeking a court order may be an appropriate remedy. The courts have an inherent jurisdiction to vary the terms of trust but will generally only exercise this when it is absolutely necessary and will avoid interfering with the intentions of the settlor in establishing the trust in the first place. The circumstances under which a court might exercise such jurisdiction have been narrowly defined, such as clarifying the settlor's intention as to beneficial interests.3

B. Trust law in the UK and Cayman Islands

Fortunately, trust law has sufficiently evolved over the many years to further assist trustees by enabling them to address a predicament encountered in the "management and administration" of the trust, by virtue of the Variation of Trusts Act 1958 and the Trustee Act 1925 in the UK . Cayman Islands Law has corresponding provisions in the Trusts Law (2009 Revision).

In the recent case of Christopher Southgate & Anor v Peter Sutton & Ors4. the UK Court of Appeal examined an application by the trustees under Section 57 (1) of the Trustee Act 1925 (the corresponding provision is Section 63 (1) of the Trusts Law (2009 Revision) under Cayman Islands law).

In this case, the trustees sought powers from the court for appropriation and partition of the trust property vested in them as trustees to create a sub-trust of separated funds to be known as the "Southgate sub-fund" for the benefit of those beneficiaries under a family trust who were resident in the United States (the "Southgate Beneficiaries"). The mischief they were trying to remedy was the potentially disastrous tax consequences for the Southgate Beneficiaries of leaving things the way they were, as at the time both inheritance tax and capital gains tax would be applicable. The proposed remedy would require that the separate Southgate sub-fund be administered by US trustees with the Southgate Beneficiaries being entitled to beneficial interests in the whole of the income and capital of the trust property of the Southgate sub-fund.

Section 57 (1) of the Trustee Act 1925 provides that:-

"where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or any purchase, investment, acquisition, expenditure, or other transaction, is in the opinion of the court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by the law, the court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms and subject to such provisions and conditions, if any, as the court may think fit and may direct in what manner any money authorized to be expended, and the costs of any transaction, are to be paid or borne as between capital and income."

The judge in the first instance, Mann, J. took the view that the proposed transaction would be expedient for the trust as a whole, but he declined to grant the application on the ground that he was not satisfied that it fell within the court's powers under Section 57 (1) of the Trustee Act 1925.

The Judge examined and relied on evidence submitted to him on the unreported Cayman Islands case of MEP v Rothschild Trust Cayman Ltd, where there were appropriations to a sub-trust for administrative reasons (such appropriations were made and approved under Section 63 of the Trusts Law (2009 revision), the Cayman Islands equivalent of Section 57 of the UK Trustee Act 1925). Mann, J. distinguished the case before him from the Cayman Islands case in concluding that the Cayman case was one in which the trusts affecting the funds in the sub-trusts were precisely the same as they were before the application. He contrasted this to the application before him, which he viewed as "conceptually different" rather than a change in how the interests are in fact enjoyed, creating a different set of beneficial interests, qualitatively speaking, to those that currently exist.

Given the information available to him at the time, Mann, J. did indicate that it appeared that this would have been a more appropriate application under the Variation of Trusts Act 1958 (the equivalent Section 72 of the Trusts Law) under Cayman Islands law, which allows the court to vary the terms of the trust and to provide consent for certain types of beneficiaries where they cannot do so for themselves. This section however does still require the consent of all other existing sui juris (over 18 years of age and legally able to give consent) beneficiaries. These changes can be broader than just administrative and managerial and include those relating to beneficial interests under the trust. The change, however, must be a variation of the trust and not a complete resettlement of the trust such as would be permitted under the rule established in Saunders v Vautier.

However, in view of fresh evidence provided in the Christopher Southgate appeal, the Court of Appeal took into account that due to a current change in circumstances there was a real possibility that the entire capital share of the Southgate Beneficiaries would be absorbed by avoidable burdens of double taxation. It also was disclosed to the court for the first time that some of the beneficiaries refused to agree to the proposed amendment, making it impossible to utilize the rule in Saunders v Vautier5 since there would be no consent of all existing sui juris beneficiaries to make an application to vary the trust under the Variation of Trusts Act 1958.

The Court of Appeal was provided with further details as to the Cayman Islands case of MEP v Rothschild Trust Cayman Ltd 2009 CILR 593 and the application under Section 57 (1) of the Trustee Act 1925, and determined that in fact the Cayman case was virtually identical in circumstances to the Christopher Southgate case. In MEP v Rothschild Trust Cayman Ltd, Smellie, CJ did make an order that although the partition would alter the structure of the trust, the sub-trusts remained governed by the terms of the original trust and there was only an incidental impact on the respective beneficial interests. The Court of Appeal therefore concluded that the best interests of the beneficiaries as a whole would be served by the creation of the new sub-fund, since the trust would remain the same but the income for the Southgate Beneficiaries would be derived from the sub-fund. The appeal was successful.

C. Saunders v Vautier rule

Where all of the beneficiaries absolutely entitled to the trust property agree to end the trust and all of the beneficiaries are sui juris, the beneficiaries can bring the trust to an end and/or resettle under new terms under the rule in Saunders v Vautier, thereby allowing the trustees to remedy their issues. Under the Saunders v Vautier rule the beneficiaries can resettle the trust in a manner that is completely contrary to the settlor's intention provided that all of the beneficiaries so agree. This may also include removing the trustees. Therefore, indemnity is always of high importance for the trustees, not just in respect of an executive decision to remedy issues within the trust by the trustees, but also in the event that they resign or are removed.

The trustees are personally liable for contractual, tortuous or tax liabilities of the trust. Liability is personal to the trustees and does not move to the successor trustees. Whilst the trustee can discharge liabilities whilst he is in office and reimburse himself from the trust fund, these options may not be available if he is removed or if there are no funds to reimburse himself as there is no immediate cash available in the trust fund.

III. Directors' responsibilities

The fiduciary responsibilities of the trustee can also be far more complicated that those of a director. Whilst they bear similar responsibilities to those of a director, they may have opposing responsibilities, such as where the trustee is the sole shareholder of a company, the shares of which are held as assets of the trust, and the trustee, his employees or affiliates are appointed by the shareholder/trustee as the directors of that company.

In Ta-Ming Wang and Kuo-Ying Shang v CIBC Bank and Trust Company (Cayman) Limited and T.M. Wang Limited6, the Grand Court of the Cayman Islands was asked to set aside a declaration of dividend payments made by the trust's asset holding company to its sole shareholder, the trustee, CIBC Bank and Trust Company (Cayman) Limited ("CIBC"). This dividend payment attracted significantly greater tax than anticipated due to an error in calculation as to the relevant tax holiday dates in Canada. The application to set aside was made under the Hastings-Bass7 principle and under the court's discretionary powers under Section 48 of the Trusts Law (2009 Revision). The Hastings-Bass principle allows the courts to interfere with trustees' exercise of a discretion if it is clear that the effect of such exercise was different from that intended, due to a failure to take into account relevant considerations or taking into account irrelevant considerations. The Hastings-Bass principle is recognised in the courts of the Cayman Islands.

In Ta-Ming Wang, the directors of the asset holding company of the trust were subsidiary companies of CIBC, which is a fairly common structure, and referred to as "nominee directors". Interestingly enough, the outcome of this case was greatly influenced by the directors' status with respect to the asset holding company, which the Chief Justice referred to as being 'no more than as nominees of CIBC'. The Chief Justice concluded that, even though the directors were nominees of the trustee, the court could not overlook the legal obligation placed on directors to act independently on behalf of the company in respect of which they are fiduciaries. The directors in this case were viewed as 'mere nominees' acting on the directions of their principal, the trustee, the Court determined. Hastings-Bass would not apply because the decision in question was not that of the fiduciary decision makers, but rather procured by the trustee.

It was noted though that the Hastings-Bass principle could in theory apply to the decisions of company directors, on the basis that the fiduciary duties owed by directors were akin to those owed by trustees to their beneficiaries, and the principle could apply to any exercise of a fiduciary power by a person in a fiduciary position. The Chief Justice ruled that in this case there was no evidence of what factors the directors took into consideration, and no basis on which the court could assume that the directors had the interests of the trust or its beneficiaries in mind when making their decision. The court held that the only reasonable inference that could be drawn was that they were simply acting in the interest of the company itself, on the instructions of CIBC which owned all of the common shares.8 Therefore the Hastings-Bass principle could not apply.

There has since been the important Court of Appeal decision in Pitt v Holt; Futter v Futter [2011] EWCA Civ 197 which has narrowed the application of Hastings-Bass. Similar to the Ta-Ming Wang case, the trustees had obtained and relied upon incorrect tax advice provided by a professional. Based on the incorrect advice, the trustees also in this instance made a decision that had adverse tax consequences to the beneficiary of the trust. The beneficiary sought an order through the courts to set aside the settlement and the subsequent assignment of the annuity paid by the trustees under the trust as either being void or voidable under the Hastings-Bass principle or, in the alternative, that the court exercise its equitable jurisdiction to grant relief on the grounds of mistake. The Court of Appeal's leading judgment was delivered by Lloyd L.J., in which he analysed the judgment of Buckley L.J. as well as his earlier decision in Sieff v Fox [2005] EWHC 1312 (Ch). Lloyd L.J. then clarified the correct ratio of Re Hastings-Bass to be held as follows:

"Trustees considering an advancement by way of sub-settlement must apply their minds to the question whether the sub-settlement as a whole will operate for the benefit of the person to be advanced. If one or more aspects of the provisions intended to be created cannot take effect, it does not follow that those which can take effect should not be regarded as having been brought into being by an exercise of the discretion. That fact, and the misapprehension on the part of the trustees as to the effect that it would have, is not by itself fatal to the effectiveness of the advancement.... If the provisions that can and would take effect cannot reasonably be regarded as being for the benefit of the person to be advanced, then the exercise fails as not being within the scope of the power of advancement. Otherwise it takes effect to the extent that it can."9

Lloyd, L.J. however went on to state that if "the trustees seek advice (in general or in specific terms) from apparently competent advisers as to the implications of the course they are considering taking, and follow the advice so obtained, then in the absence of any other basis for a challenge, I would hold that the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, in such a case I would not regard the trustees' act done in reliance on that advice, as being vitiated by the error and therefore voidable"10.

The court in Pitt and Futter found the actions of the trustees to not be voidable under the redefined Hastings-Bass principle as a result of the professional advice obtained and relied on by the trustees. The judgment also made the point that where the trustees act outside their powers, their actions would be void. However, as the actions of the trustees in this case were within their scope of powers as trustees they were found to not be void.

Lloyd, L.J. also determined that to set aside a voluntary transaction under the principle of mistake, there has to be a mistake as to the legal effect of the transaction or a relevant mistake as to a material fact. An unforeseen tax consequence of the transaction was held to not be an "effect" but a consequence of the mistake.

IV. Professional advice

The case of Pitt and Futter also brings to the forefront the importance of trustees seeking professional advice before making important decisions under the exercise of a power. The decision made by the Court of Appeal is generally regarded as welcomed and correct. The Court of Appeal makes it clear that where trustees take and rely upon professional advice in the execution of their duties, they have fulfilled their duties and obligations notwithstanding that such advice turns out to be erroneous. However, it means that the beneficiaries will not be able to rely on the Hastings-Bass principle under those circumstances to undo the transaction notwithstanding that it was done in error and to the detriment of the beneficiaries. The beneficiaries will therefore have no recourse against the trustees if they can no longer prove breach of fiduciary duty, nor will they have recourse against the professional on whose advice the trustees proceeded, as there would be no contractual obligation owed to the beneficiary unless the opinion was also extended to the beneficiaries or a duty of care was owed to them as beneficiaries. This may prove difficult for the beneficiaries to establish, although it may be the case that trustees do have an obligation to act in the best interest of the beneficiaries and are therefore obligated to take action against the professional adviser.

The ultimate irony is that while the case of Pitt and Futter provides protection for trustees who seek professional advice before making decisions regarding the exercise of a power, the trustees' protection is achieved by sacrificing the protection of the beneficiaries from unintended consequences.


1 Christopher Southgate & Anor v Peter Sutton & Ors [2011] EWCA Civ 637 (CA)

2 Society of Lloyd's v Robinson [1999] 1 W.L.R. 756

3 Chapman v Chapman [1954] A.C. 429

4 2011 EWCA Civ 637

5 (1841) Cr. & Ph. 240

6 2010 (1) CILR 541

7 Hastings-Bass, In re, Hastings v Inland Rev. Commissioners [1975] Ch. 25.

8 Supra, paragraphs 19 to 24

9 At paragraph [64]

10 At paragraph [127]

Sophia Harris LLB is Managing Partner at Solomon Harris Attorneys-at-Law based in Grand Cayman, Cayman Islands. Her practice areas include: : Banks and Banking; Business Law; Company Law; Corporate Law; Mutual Funds; Commercial Law; Contracts; Capital Markets; Listing Services; Collective Investment; Mergers, Acquisitions and Divestitures; Partnership; Securities and Trusts. She may be contacted by email at:

Solomon Harris is a full service corporate/commercial law firm specialising in international offshore work with recognised expertise in a number of niche areas, including investment funds, captive insurance, capital markets and corporate restructuring/insolvency. The Firm has offices in the Cayman Islands and Zurich, Switzerland.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions