Cayman Islands: Death, Divorce and Taxes: Their Impact on Cayman Islands Trusts

Last Updated: 7 March 2006
Article by Sara Collins and Morven McMillan

Most Read Contributor in Cayman Islands, November 2017

The contentious trusts practitioner in the Cayman Islands often finds him or her self occupied in defending the trust at the offshore frontier against challenges from disgruntled heirs, spouses and creditors including foreign revenue authorities and a great deal of time and attention has been spent in developing a statutory framework which incorporates comprehensive foreign element provisions designed to allow for certainty for those settling Cayman trusts. The response to those challenges relies on certain unique features of Cayman Islands statute law1, as well as a vibrant and developing common law.

By way of brief introduction, the law of the Cayman Islands is very closely related to English law and in general terms comprises English common law and equity, English or United Kingdom statutes which have been accepted as part of Cayman Islands law through past general usage or which have been expressly extended to the Cayman Islands, together with local legislation enacted by the Legislative Assembly of the Cayman Islands or its predecessors. Cayman trusts law has largely developed on the basis of, and in line with, English common law and equity with certain unique features which will be explained below.

The statutory regime in the Cayman Islands prevents the invalidation of a trust or any disposal of property into trust on the basis of forced heirship claims and/or claims based on foreign divorce orders. There is a statutory presumption of lifetime effect.

Indeed, the relevant provisions of the Trusts Law have been successfully deployed in resisting challenges to Cayman Islands trusts based on forced heirship rules in the settlor’s jurisdiction of domicile as well as attempts to enforce orders made by foreign courts varying settlements for division of assets on a divorce.. It is not only the death or divorce of the settlor which could give rise to a challenge from overseas. The potential impact of foreign revenue law often comes under scrutiny by the Cayman courts in various ways and some provisions of the UK Taxation of Chargeable Gains Act 1992, have recently raised some interesting issues.

Bearing in mind that in general terms Cayman Islands law comprises English common law and equity, the statutory provisions are often not the end of the story. The Cayman courts are likely to follow the well-established line of cases dealing with "sham" transactions, but in the unique statutory context of the Cayman trusts legislation. Foreign revenue law might also increasingly be the motivation behind applications to the Cayman courts under the rule in Hastings-Bass, depending on how that jurisdiction develops.

The statutory framework

The combination of the reserved powers provisions and the foreign element provisions in the Trusts Law limits the likelihood of successful challenges to Cayman trusts from disgruntled heirs or spouses.2

Part III of the Trusts Law codifies the extent to which various powers may be reserved to the settlor of a trust without leading to a finding that the trust is a sham or some other legal relationship (e.g. an agency or nominee arrangement). Section 14(1) provides that numerous powers can be so reserved without invalidating the trust, including any power to revoke, vary or amend the trust instrument, general or special powers to appoint income or capital, limited beneficial interests in the trust property, power to act as director or officer of any company whose shares are wholly or partly owned by the trust, to give binding directions to the trustee in connection with the purchase, holding or sale of the trust property, to appoint add or remove a trustee, protector or beneficiary, to change the governing law or forum for administration of the trust and to restrict the exercise of any powers or discretions of the trustee.

Section 13 provides for a rebuttable presumption of lifetime effect if an instrument is not expressed to be a will, testament or codicil or take effect only after the death of a settlor. The presumption will not be affected by reservation of powers under Section 14 but could be rebutted by evidence of contrary intention, including evidence that the trust is in fact a sham.

The Foreign Element Provisions

Section 93 of the Trusts Law provides that a foreign judgment cannot be "recognised, enforced or give rise to any estoppel insofar as it is inconsistent with sections 90 or 91". Section 91 of the Trusts Law generally prevents the enforcement of forced heirship rights against a Cayman trust as well as the enforcement of foreign orders for division of property on divorce3 and , in general terms, provides that no Cayman trust is void or voidable by reason that it "defeats rights, claims or interests conferred by foreign law upon any person by reason of a personal relationship to the settlor or by way of heirship rights" or that the foreign law does not recognise the trust concept.

The position in relation to attempted enforcement of forced heirship rights is relatively clear. The rationale behind the statutory approach has been reflected in the court’s willingness to authorise Cayman trustees to defend their trusts in the foreign jurisdiction and to limit disclosure of trust documents to beneficiaries who are making foreign challenges. In Lemos v Coutts & Co [1992-93] CILR 460, for example, the Cayman Islands Court of Appeal confirmed a Beddoe order in favour of the Trustee of a Cayman trust, allowing the Trustee to defend the trust from challenges mounted in Greece on the basis of, inter alia, Greek forced heirship provisions and agreed with the Chief Justice’s assessment that this was part of the Trustee’s duty in protecting the trust. In Lloyds Bank v Byleven [1994-95] CILR 519, not only the Trustee but the trust Protectors (as persons who could be authorised jointly with the Trustee to defend the trust) were authorised to expend trust funds in resisting New York proceedings challenging the trust. In Re Ojjeh [1994-95] CILR 118, Cayman trustees were given leave to seek to intervene in French proceedings, among other things, to seek to urge the French court to consider Cayman law as the proper law governing the trust.

Foreign court orders are sometimes sought, and obtained, the purported effect of which is to vary a settlement in order to give effect to the entitlement of the spouse of the settlor on a divorce. Cayman trustees are not infrequently confronted with an order of, for example, the English High Court which has the effect of varying a settlement. Such orders are clearly unenforceable against a Cayman trust or trustee in the light of the effect of section 91. However, a Trustee might be required to consider the exercise of a discretion to appoint income or capital to the settlor pursuant a request from the settlor to enable him/her to comply with obligations under the English court order, depending on the relevant terms of the trust deed.

"Sham"/Fraud arguments

The foreign element provisions do not rule out arguments based on an assertion that there is no valid trust (i.e. that the trust is a sham) or a finding of a foreign court that the settlor was not the true owner of the assets or did not have power to dispose of them, which might be the case where, for example, there is a foreign judgment establishing that the settlor has been guilty of fraud and some or all of the proceeds of the fraud can be traced into the trust or where the trust is alleged to be a fraudulent disposition.

Notwithstanding the very clear statutory provisions, it remains arguable that reservation of powers in excess of those set out in the statue could render the trust vulnerable to challenge as a sham in the Cayman Islands. The concept of an "irreducible core" of trustee obligations was reinforced in the Grand Court decision of Lemos and others v Coutts (Cayman) Limited (unreported) 30 July 2003, applying the principle expressed by Millett LJ in Armitage v Nurse [1998] Ch 241. If this "irreducible" core of obligations is absent or unenforceable, it could be argued that there is no trust and/or this is evidence that the settlor did not really intend to give control to the Trustee for the benefit of the beneficiaries.

The Cayman Islands courts are likely to adopt the general approach that the courts will not readily uphold documents which are a fiction in the sense that they bear no real relation to the facts of a transaction the terms of which they purport to embody. The statutory regime does mean, however, that testing an allegation in the Cayman courts that a trust is a sham will depend to a large degree on an analysis of the extent of the reserved powers and whether they exceed those permissible by statute and/or evidence of the settlor’s actual intention at the time of settlement of the trust as well as the behaviour of the settlor and the trustee during the course of administration of the trust.

In the Cayman off-shoot of the Grupo Torras litigation, this aspect of which is reported at Grupo Torras v Butterfield Bank [2000] CILR 441, Grupo Torras sought to assert a tracing claim to assets held in the Comfort Trust, described as "an instrument" of the settlor, Sheikh Fahad, "the grantor and its only primary beneficiary". The decision concerned an application to strike out portions of the tracing claims on the ground that, among other things, they disclosed no reasonable cause of action. The crux of the defendants’ submissions was that , although a tracing claim was pleaded, it failed to identify the property which the plaintiff sought to trace. Smellie J (as he then was) held that the inferences to be drawn from the facts pleaded would sustain the cause of action and focused in particular on the Sheikh’s identity with the trust, the fact that "Sheikh Fahad has become regarded and described by the English courts as a sophisticated international fraudster…shown to use his trusts…as repositories of large sums of the plaintiffs’ moneys and as vehicles by which to maintain his personal lifestyle, he being the trusts’ grantor and, also, at the same time, their sole primary beneficiary". The allegations survived the strike out application. The index to the Cayman Islands reports describes the effect of this decision as leaving it arguable but not yet established that the "veil" of a trust can be lifted in the Cayman Islands for a victim of fraud. This, of course, could be seen as a "sham" allegation by another name and it is thought, in particular following the decision in Abacus (CI) Ltd and others v Sheikh Fahad Mohammed Al Sabah and others in Jersey in 2003 in which the Royal Court of Jersey held that the appropriate allegation would be sham, that this is how such an argument would be dealt with in Cayman.

Enforceability of tax liability

In 160088 Canada Inc v Socoa International [1997] CILR 409, the plaintiff raised an argument that it would be contrary to public policy for the Grand Court to recognise the jurisdiction of a foreign court over a Cayman company which was not resident abroad. Smellie J (as he then was) read into that argument an implication that the fear was that this might lead to Cayman tax-exempt companies being the subject of foreign tax impositions. He described the argument as "far-fetched" and noted in doing so that it is "settled that this court might not recognise or enforce foreign judgments for the imposition of taxes", citing Government of India v Taylor [1955] AC at 514.

Is is well established that the indirect enforcement of a foreign revenue law is also impermissible but this gives rise to often complicated questions. It is not always the case that foreign revenue laws can simply be ignored by a prudent trustee of a Cayman Islands trust. Those laws may be relevant for important reasons. They may form the basis for an attack against the trust by foreign revenue authorities (dressed in private claimant’s clothing) and for that reason, among other things, will form part of the issues to be considered on accepting a trusteeship. They may also be a relevant consideration, which the Trustee should take into account in entering into any transaction involving the trust assets.

The recent case of Bridge Trust v Attorney General of the Cayman Islands and others, arising from the same facts as Re State of Norway’s Application (Nos 1 and 2) [1990] 2 AC 723 and concerning a claim made on behalf of the estate of a deceased Norwegian shipowner to be entitled to the assets of a Cayman Islands charitable trust, is an illustration of the first consideration. The estate’s claim in a nutshell was that the trust was a sham which had been settled using a "frontman" as the ostensible settlor. The Norwegian Revenue was a substantial creditor of the estate and, on the basis that its claim had priority, no other creditor was likely to paid from any recovery achieved on behalf of the estate in the proceedings. The question whether that claim was one in substance brought for the indirect enforcement of Norwegian revenue laws was raised in the proceedings but ultimately never determined by the court as the proceedings were discontinued following a compromise.

It is interesting to compare and contrast the approach of the Cayman courts dealing with questions concerning the recognition of foreign receivers appointed by the United States Securities and Exchange Commission. The case of Marada Global Corporation v Marada Corporation and others [1994 – 95] CILR 546 concerned a claim made by a company in respect of which a receiver had been appointed by a US court on the application of the US Securities and Exchange Commission ("SEC"). The company’s claim was for money had and received relating to funds held in the Cayman Islands. Under the US court order, the receiver was authorised to recover funds for the benefit of the company, its investors and creditors and not for distribution to the SEC. It was argued that the proceedings were designed to give extraterritorial effect to the penal law of a foreign jurisdiction (i.e. the US)4. The Grand Court held that, although the relevant SEC legislation was penal in nature, "this is now a claim by a corporation asserting a good arguable case in respect of rights which are available to any private litigant", viewing it as an important distinction that the application of the funds recovered (and, presumably, the prohibition on recovery for the SEC) was a matter which the US court itself had dealt with as part of the terms of the receivership.

Circumstances which give rise to a statutory right of reimbursement on the part of a settlor in respect of tax liability can also present interesting issues. In Prestwich v Royal Bank of Canada Trust Co (Jersey) Ltd (1998/99) 1 ITELR 565, the English High Court allowed service out of the jurisdiction on foreign trustees (in Jersey) of a claim for statutory reimbursement. Would an English judgment on a claim for reimbursement be enforced in the Cayman Islands against the assets of a trust governed by Cayman Islands law? In Guernsey, such a judgment has been enforced, although in respect of a trust governed by English law.5

The incidence of the tax liability may have other implications for attempts to avoid unintended tax liability by way of the application of the rule in Hastings –Bass where the question may be whether it matters whether the liability to tax falls on the Settlor as opposed to the Trustee. The argument would be that the Trustee failed to consider a tax consequence which was a relevant consideration or failed to consider what he was under a duty to consider6. There is some basis for arguing that, if the Settlor’s right of reimbursement is not enforceable against the trust assets, the tax consequence in such circumstances is not a factor which the Trustee was under a duty to consider. Whether such an argument could successfully be made to prevent the application of the rule may depend on whether the Cayman courts will follow the lead of the Guernsey courts in the Kleinwort Benson decision.

However, it may not be necessary to go as far as concluding that the right to reimbursement would be enforceable in the Cayman Islands. It might make a difference that the settlement is CGT driven and/or that Settlor is a beneficiary of the trust and/or there is some other arguable reason why the Trustee could be said to have a duty to consider his/her interests in entering into the transaction. In an unreported decision dealing with unintended CGT liability to a settlor who was a beneficiary of the trust, the Grand Court was asked to consider such an application under a foreign law (found to have governed the trust at the time of the relevant transaction and before it migrated to Cayman). The court expressly indicated that the foreign law in question would be of the same effect as Cayman (and indeed English) law. The court applied the rule in Hastings Bass. The argument that the tax consequences to the settlor were not a relevant consideration to be taken into account by the Trustee in those circumstances was not made by any of the parties to that particular application but it seems that the court would have been persuaded by consideration of the purpose of the settlement if such an argument had been raised. In addition, the court’s approach was to leave open the question whether a breach of fiduciary duty was required in order for the relief to be granted while assuming that a breach could be demonstrated on the facts of that case if required. This implies that the Cayman court will look favourably on such applications in the future, in particular if the relevant foreign revenue authority does not take an active interest in opposing them.


1. The principal statute is the Cayman Islands Trusts Law (2001 Revision) ("the Trusts Law")

2. It remains to be seen how the reserved powers provisions will be viewed in foreign courts (for example, the English courts) and in particular whether any public policy arguments could be brought to bear against them. Section 90 of the Trusts Law mandates that all questions arising in regard to a Cayman trust or any disposition of property on a Cayman trust "are to be determined" according to Cayman Islands law, including all questions concerning the validity of the trust. Underhill and Hayton (16th ed), dealing with the question of the recognition of non-charitable purpose STAR trusts by the English courts, states that "English courts should be very slow to use public policy simply because a trust governed by a foreign law shows different characteristics to the English domestic trust…". The feasibility of making a public policy challenge in a foreign forum may ultimately depend on whether there would be any prospect of enforcing any foreign judgment obtained against the assets of the trust (if, for example, located in the jurisdiction of the challenge)


4. The Cayman court having held in Stutt v Premier Benefit Capital Trust [1992-93] CILR 605 that a foreign appointed receiver would not be recognised if the effect of his recognition would be to give effect to the penal laws of the jurisdiction concerned

5. In Kleinwort Benson (Guernsey) Trustees Limited v Wilson (2003). The Guernsey court expressed the view that the outcome would have been the same if the proper law was different

6. If the test is as set out in the controversial decision in Abacus Trust Co v Barr [2003] Ch 409 per Lightman J that it is necessary to establish a breach of fiduciary duty in failing to obtain comprehensive tax advice before entering into the transaction. The Cayman courts are likely to follow any subsequent guidance offered by the English courts on this question.

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.

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