Cayman Islands: Five Reasons For Placing One's Trust In – Well, Trusts

Last Updated: 29 September 2016
Article by David Cooney

This article first appeared in International Investment

Many people are baffled by trusts, the purpose of which they don't fully comprehend. Some even regard them with suspicion, as tools of of opaque tax evasion strategies of a type favoured by wealthy individuals.

Here, David Cooney, partner and head of Private Client & Trusts with Ogier's Cayman Islands office details five reasons they remain an essential tool in wealth managers' tool kits, none of which has to do with tax evasion.

For many the word "trust", when used to describe a type of asset-holding device, has recently become synonymous with "tax reduction", or even "avoidance." This perception, in fact, has driven changes to trust legislation around the world.

In some cases the changes have introduced taxes on trusts, their settlors and even their beneficiaries that can only be described as penal.

In 2011, for example, France introduced rules which treat a beneficiary of a discretionary trust – despite having no vested interest in the trust income or capital – as the "settlor" of that trust. And as a "deemed settlor", that beneficiary is liable to pay tax in France, calculated by reference to the value of the trust fund, even though that beneficiary may never receive anything from it.

Yet in spite of such changes, trusts continue to be used by many of the world's wealthiest families, because, in actual fact, trust planning is rarely all about tax planning.

Here, we look at five reasons why the trust is still alive and well, in spite of the usually well-intentioned but typically uninformed efforts of lawmakers to use it as a tool for going after wealthy tax evaders.

1. Probate avoidance

In most places, if someone dies while owning an asset, there is a formal process to follow. In the common law world, such as the UK and its overseas territories, this involves obtaining a Grant of Representation (called a Grant of Probate if the deceased left a valid will).

In some places this post-death process is very quick. In other places, it takes months to complete, and is an expensive and complicated process. Assets can be, and often are, frozen while the Grant of Representation is obtained; but this can be problematic where volatile investment assets are owned, as values can fall dramatically while those due to inherit are forced to wait for the Grant of Representation to be processed.

Trusts, though, allow these time-consuming post-death processes to be avoided.

If a person sets up a trust in their lifetime and puts their assets into that trust, when they die, the trustee of the trust is then seen to own those assets, and so a Grant of Representation is not required with respect to them. A Grant might still be required for any of the deceased's assets that weren't included in that, or any other, trust.

Interestingly, this strategy is much-used in the Cayman Islands, one of the world's most popular investment fund domiciles. Here, it's extremely common for investors to set up trusts to own their investments in funds, with the sole purpose of avoiding the need for a Grant of Representation upon their death.

2. Succession Planning

Family businesses often struggle, and sometimes fail, after the head of the family which owns them dies, and the business passes to the next generation.

Although there are many reasons why this might happen, one that lawyers see fairly often is when the succession planning is not considered during the life of the matriarch or patriarch. Typically, it's only after the death of the first generation that the second generation begins to take a role in the running of the family enterprise, and the management of the family wealth.
And all too often, this second generation lacks the skills and experience to do so properly.

Trusts can provide a solution to this common problem, by enabling the second generation to begin getting involved in the family business while the family's matriarch or patriarch is still alive.

The nature of the role played by the second generation will depend on the level of control that the first generation are happy to cede. One arrangement that seems to work well is when the second generation is made part of an "advisory council" to the business. In this role they can be given specific roles and responsibilities, the nature of which can change as they settle into their new roles.

3. Ownership and Control

Another use for trusts that also has to do with family businesses comes into play when the second generation wants an assurance that they, and not some outside party, will receive the family business when the first generation dies.

This matters because the second generation typically want to make sure that the time they devote to the business's development while the first generation is still on the scene – which can span decades, during which they might be building a career elsewhere – will not have been wasted.

At the same time, an elderly matriarch or patriarch may be reluctant to give up control of the business during their lifetime, as this comes with a (perceived or actual) loss of social and familial status.

Trusts, which allow for ownership and control to be separated, can be the perfect solution in such cases. The matriarch or patriarch can retain a significant degree of control over the family business, while allowing the second generation to benefit from the certainty of knowing that the business will be preserved for them.

4. Privacy

According to Privacy International, privacy is "a fundamental right...[to]...protect ourselves from unwarranted interference in our lives".

It is not, contrary to much commentary in the wake of the Panama Papers revelations earlier this year, about avoiding tax, nor is it about committing crimes.

There are a growing number of international initiatives in place, or in an advanced stage of development, which address concerns that trust structures are being used to mask criminal activity and to avoid or evade tax payments. These include the American FATCA regulations, those of the UK and other countries which are modeled on them, the OECD's Common Reporting Standard, and (non-public) registers of beneficial ownership.

As some of the debate surrounding the creation of beneficial ownership registers has shown, privacy is widely regarded as a fundamental right, even though there are those who would see it take a back seat to the public's "need" to know who owns what.

For now, at least, trusts continue to be used by some individuals keen to preserve the privacy of their holdings. The way it works is that the Trustee is the owner of the assets held within the Trust; the deed or document establishing the trust is a private arrangement between the parties to it.

Many high net worth families transfer their assets to trusts for the simple reason that they don't want others to know what assets they own, or where those assets are.

Critics of this right to privacy would argue that those asserting the right are only trying to avoid tax, and while I'm not going to pretend that this has never happened (as it has with structures throughout the onshore world, too), what we at Ogier see are ultra-high net worth families for whom kidnap and extortion are genuine and significant risks looking to reduce those risks. This is particularly true in certain parts of the world, such as Mexico and Latin America.

In other cases, UHNW families desire privacy because they, (commendably, many people would say), wish to shield their children from the reality of the family's true wealth until such time as the children are old enough to be able to understand and deal with the implications of that wealth.

While we live in an age in which people are accustomed to the idea that it's normal to share even the most minute details of their everyday lives on social media, it is important to remember that this is a fairly recent development, and not necessarily one that everyone wants applied to all aspects of their lives – as professional wrestler Hulk Hogan argued recently, and successfully, in court, against Gawker Media Group. (Hogan argued that his privacy had been invaded by the organisation's coverage of his private life.)

5. Organisation

Many of the world's biggest and most successful family businesses have operations in multiple jurisdictions, operate across multiple industries, and involve multiple generations of the founding family in key roles. They are very complicated operations.

Trusts are often used as the ultimate owning entities for these complicated structures. Under such arrangements, the Trustee has an oversight role, in respect of the activities of the underlying companies.

The Trustee can, for example, assist with the movement of capital around the structure, so that it reaches areas of the business where that capital is needed.

The Trustee can also ensure that family members are involved in the business or businesses in a way that best utilises their individual skills and helps them to develop new ones. He or she can also ensure that capital and income can be distributed from the structure, for the benefit of any family members who might need it.

Linked to this concept of organising family businesses through trusts is a growing trend towards families setting up "Family Funds". A Family Fund is the name given to an entity – usually a limited company – which is established to operate like a mutual/investment fund.

Multiple members of the same family come together to pool their assets within the fund structure; they appoint an investment manager; and then they seek to maximise their returns, reducing costs through the economies of scale that arise out of the pooling of their assets.

In many cases a trust holds the management (voting) shares in the Family Fund. This allows the Trustee to control the decision making within the Fund. The family members each own participating shares, which entitle them to share in any income distributions or capital gains.

Summary

In short, then, for as long as trusts can be established in a manner that does not attract penal taxation, trusts will continue to be widely used in the planning arrangements of high-net-worth families around the world.

The many benefits of using trusts have long been known to the people who use them to hold their family wealth; and in many cases, there is no viable alternative to the trust in achieving a client's goals. Hopefully, lawmakers around the world will realise this, in the months and years ahead, as they continue to try to find ways to end tax evasion that actually work.

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 Mondaq.com.

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

Authors
 
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”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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