Cayman Islands: Duties And Liabilities Of Trustees

Last Updated: 20 August 2008
Most Read Contributor in Cayman Islands, September 2018

INTRODUCTION

Cayman Islands trust law is based on a body of English law which has developed over many hundreds of years. There is no statutory definition of a trust but the following is often used:

A trust is a legal arrangement whereby one or more persons (the trustees) have legal title to property and are legally obliged to deal with it for the benefit of another person or class of persons (the beneficiaries) or for certain lawful purposes.

The trustee is the legal owner of the property but the beneficiaries are beneficially interested in it. The trustee owes fiduciary duties to the beneficiaries.

FEATURES OF A TRUST

The essential features of a trust are:

  1. the separation of legal and beneficial ownership. The trustee is the legal owner of the property but the beneficial interest lies with the beneficiary;

  2. the trustee cannot use the property for his own benefit (unless expressly authorised by the terms of the trust). He must manage and distribute the property for the benefit of the beneficiaries; and

  3. the rights of the beneficiaries depend on the terms of the trust. While some types of trust give the beneficiaries rights to call for the trust property to be transferred to them, others give the beneficiaries no absolute rights at all. This means that a person who sets up a trust of which he remains a beneficiary will not have the same rights over the property as he had when he owned it absolutely. This is an important feature of trust law.

These basic aspects of a trust arrangement flow from the body of trust law which has developed over the years. These can be varied and added to by the special arrangement made between the particular settlor and the trustees.

TRUST PROPERTY

In principle, any type of property, from bank accounts, to land, to jewellery, to pictures, can be put into a trust. In practice, a professional trustee will need to consider carefully what type of property it would be prepared to accept in each particular case, bearing in mind that it has a duty to protect the trust fund.

WHO MAY ACT AS TRUSTEE?

A trustee is defined as a person having an obligation to deal with property, over which he or she has control, for the benefit of other persons (beneficiaries) of which he or she may be one.

Both individuals and corporations licensed as trust companies under the Banks and Trust Companies Law (as amended) may act as trustees of a trust. According to Cayman Islands law it is possible to have a sole trustee (although this is not recommended practice except in the case of a corporate trustee).

Whereas an individual is liable for the whole of their assets in the event of a claim against the trustee, a trust company is liable to the extent of its capital.

All licensed trust companies offering trust services to the public in the Cayman Islands are required to be capitalised with a minimum of US$500,000.00 thus exposing the entire capital of the company to attack in the event of a claim against the company. In addition the management and ownership of the trust company is subject to prior approval by the Cayman Islands' Government.

DUTIES OF A TRUSTEE

A trusteeship is a fiduciary relationship, and the trustees are bound to act bona fide in their dealings with the trust and are bound to exercise care and skill in their judgment. They have a duty to act in the best interests of the beneficiaries. Their main duties are set out below.

Duty Of Care

A trustee should exercise care and skill in administering the trust; a professional trust company has the highest duty of care to its beneficiaries in view of its professed expertise.

Power To Invest

Trustees have onerous investment obligations. When making investment decisions trustees must take as much care as a prudent man would take in making an investment for a person for whom he felt morally obliged to provide. The types of investment which a trustee is entitled to make are very restricted, unless expressly extended in the trust instrument.

Balance Income And Capital

The trustee must maintain a balance between beneficiaries interested in income and capital, which will affect their investment decisions, unless specifically authorised not to do so.

Protection Of Assets

A trustee must take steps to preserve and protect the assets in the trust fund.

Conflicts Of Interest

The trustee must disclose any conflict in relation to the trust. A trustee must not generally profit from the trust. This means that the trustee's business must not compete with the business of the trust (if any). A trustee could not, then, take advantage of the fact that he is the trustee, for example by using an affiliated trust company as investment adviser. The profit of the affiliate would be regarded as inappropriate and should be returned to the trust fund. This restriction can be varied by express provision in the trust deed, and it usually is, although such a provision will be strictly construed.

Keep Records And Accounts

The trustee must keep accurate records and accounts.

Unanimity

Where there is more than one trustee all decisions should be unanimous. (See the case of Duke v South Kensington Hotel [1879] 121)

Awareness Of Powers And Liabilities

A trustee is in a special fiduciary position where he is obliged to manage the trust fund bona fide in the best interests of the beneficiaries. Before accepting such an onerous responsibility the trustee is under a personal duty to acquaint himself with the powers and liabilities which will be assumed by accepting the office. He should be certain he wishes and is able to undertake such responsibilities and he should take legal advice periodically whenever prudent.

Due Diligence

The trustees should satisfy themselves as to the legitimacy of the source of the funds in trust. They should take specific legal advice on the form of their due diligence procedures since this is a rapidly evolving and developing area of law.

TRUSTEE'S FIDUCIARY DUTIES

Act In Utmost Good Faith

The trustee has a high burden and standard to meet. He must act in utmost good faith. He must act in accordance with the terms of the trust instrument, and he must not allow his discretion to be fettered. A letter of wishes, for example must not be used as a directive, but rather as an aid available to assist in situations where a choice between several possible and equally bona fide actions must be made. The trustee may or may not decide to act in accordance with the wishes of the settlor in these cases.

Personal Gain And Self-Dealing

The trustee must not deal with the trust property for personal gain and any personal financial reward obtained through knowledge obtained from the trust will be held in favour of the trust. The trustee should not conduct any personal business with the trust unless specifically authorised to do so. This includes purchases from and sales to the trust. Such so called "self dealing" can, however, be expressly authorised under the terms of the trust instrument; but even in these cases the trustee will be expected to act fairly and not to the detriment of the beneficiaries.

Failure To Act

Failure to act properly can expose the trustee to a breach of trust claim on the part of the beneficiaries. This will be made if the beneficiaries feel that any act or omission by the trustee has wrongly prejudiced their interests. Examples would include the following:

  1. the trustee has made an imprudent investment or failed to supervise the activities of the investment adviser properly, resulting in a loss of value of the trust fund;

  2. the trustee has invested in assets producing a high income yield, to the detriment of the capital beneficiaries;

  3. the trustee has failed to acquaint itself fully with the circumstances of the beneficiaries, and therefore failed to make a payment to an impecunious beneficiary, or made a payment to a beneficiary in a manner which was not advantageous from a tax perspective; and

  4. a trustee has had undue regard to the wishes of the settlor, without properly considering the interests of the other beneficiaries.

Trustee Must Act Bona Fide

Re Hays Settlement Trust [1981] 3 All ER 876 states the trustee has a duty to consider from time to time whether or not to exercise a power. It will not be a bona fide exercise of power if the trustee acted:

  1. oppressively;

  2. corruptly;

  3. spitefully;

  4. with improper motive;

  5. for irrational or perverse reason;

  6. failed to or refused to consider exercise of the power; or

A trustee who does not comply with these duties will be liable to the beneficiary to account for any loss occasioned by the misfeasance.

LIABILITY TO THIRD PARTIES

A trust is a legal arrangement, and not a legal entity. While the trustee must deal with the trust assets for the benefit of the beneficiaries, contracts made in connection with the trust will be made in the trustee's name, not in the name of the trust. The trustee does have a right of reimbursement from the trust fund in respect of most liabilities incurred in respect of the trust, but this is clearly limited to the level of the assets in the trust fund.

This means that if the trustee enters into a contract with a third party relating to trust business (an option arrangement, for example, or a loan) that third party will be able to claim against the trustee personally under the contract. While the trustee has a right of reimbursement against the trust fund, this is limited to the assets within the fund at the time of the claim. Any shortfall will have to be met from the trustee's own pocket. trustees should be alert to this and when contracting with third parties should notify the third party of the existence of the trust and seek expressly to limit their liability to the level of assets in the trust fund from time to time. Trustees must realise that the value of the trust fund may fluctuate as the value of investments changes.

SHAM TRUSTS

The Cayman Islands adopted a trust law amendment which was 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 amended).

Agency, Not Trust

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 and 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 as the disposition is regarded as testamentary and, unless it was executed in accordance with the Wills Law, will be invalid.

Avoiding The "Sham"

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 include:

  1. power to revoke, vary or amend the trust instrument;

  2. power of appointment of income or capital;

  3. any limited beneficial interest in the trust property;

  4. power to act as a director or officer of any company owned by the trust;

  5. power to give the trustee binding directions in relation to the investment of the trust property;

  6. power to appoint, add or remove any trustee, protector or beneficiary;

  7. power to change the governing law and forum for administration; and

  8. 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 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.

EXCLUSION CLAUSES

There is as yet no concrete authority in the Cayman Islands on the extent to which a trustee can be released from default or negligence under the terms of the trust deed. Authority in other jurisdictions varies. It is clear, however, that any such provisions will be strictly construed in favour of the beneficiaries, and in order to rely on the clause the trustee must be able to demonstrate that the settlor was fully aware of its implications at the time of signing the document.

CLOSING

This memorandum is intended to provide clients of Walkers with an overview of the powers and duties of trustees of an express Cayman Islands trust. This is NOT intended to be relied on for specific legal advice. Trusts are very complex instruments and the precise obligations of the trustees will vary with the circumstances and particular provisions of the trust deed. This note is a very general guide and should be read as such.

This summary deals only with Cayman Islands law and it should be appreciated that there are circumstances in which the laws of other jurisdictions are applicable to the interpretation of the trust; in these cases the advice of foreign counsel should be obtained. Most commonly where the trust property is not located in the Cayman Islands or where the trustee is managing or administering the trust outside the Cayman Islands, a foreign court may have jurisdiction, and the foreign court may decline to uphold Cayman Islands law as the governing law of the trust despite the fact that Cayman Islands law is expressly chosen by the trust instrument.

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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