The Cayman Islands adopted a trust law amendment which is
intended to clarify the issue commonly known as "invalid
testamentary dispositions" or "sham trusts". The
amendment, which is called the Trusts (Amendment)(Immediate
Effect and Reserved Powers) Law, 1998, came into effect on 11
May 1998 and is now contained in Part III of the Trust Law (as
AGENT OR TRUSTEE?
Where the owner of property technically transfers title to
the property to someone else, with instructions to deal with
the property entirely as the owner directs and on the death of
the owner to deliver the property as a gift to a third party,
the person taking possession is merely an agent for the owner
and not a trustee. The agency terminates on the owner's
death. No interest in the property passes to the third party
before the owner dies. Nor will any interest necessarily pass
to the third party on the death of the owner because the
disposition is regarded as testamentary and, unless it was
executed in accordance with the Wills Law, will be invalid.
WHAT POWERS CAN BE RESERVED?
The question which has plagued the international trust
industry for many years is: what powers (in aggregate) can be
reserved by the settlor of a trust without there being a risk
that a Court will deem the arrangement an agency rather than a
trust (and therefore testamentary)? The amendment seeks to
clarify the position, but care is still required to ensure that
the arrangement is not operated as an agency (sometimes
referred to as an "operational sham").
The amendment creates a presumption in construing any trust
instrument which is not expressed to be a will, testament or
codicil, that such trust instrument has immediate effect.
Although rebuttable, the presumption is intended to clarify
trust instruments in which the settlor retains significant
control over the trust assets and the powers of the trustee.
The amendment goes on to list a number of specific powers, the
reservation or grant of any or all of which will not invalidate
the trust or affect the presumption of lifetime effect. These
power to revoke, vary or amend the trust
power of appointment of income or capital;
any limited beneficial interest in the trust
power to act as a director or officer of any company
owned by the trust;
power to give the trustee binding directions in relation
to the investment of the trust property;
power to appoint, add or remove any trustee, protector or
power to change the governing law and forum for
power to require the trustee to obtain consent before
exercising a power. The amendment further provides that a
trustee who complies with a valid exercise of any of the
reserved powers will not be in breach of trust.
The amendment further provides that a trustee who complies
with a valid exercise of any of the reserved powers will not be
in breach of trust
TRUSTS AFFECTED BY AMENDMENT
The amendment applies to all trusts created after 11 May
1998. The amendment also entitles the trustees of trusts
already existing at that time to extend the application of the
amendment to those trusts by deed. It is felt that this
important clarification will help the international financial
community meet market demand and, at the same time, retain the
essential features and benefits of the common law trust.
Grant Stein, Partner
Andrew Miller, Partner
Anthony Partridge, Associate
Garry Mason, Associate
Peter Harris, Partner
David Pytches, Associate
British Virgin Islands
Christopher McKenzie, Partner
Carol Hall, Partner
Rod Palmer, Partner
David Whittome, Partner
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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