Much has already been said about the life-altering changes brought about by the Covid-19 pandemic with, quite understandably, a trend towards analysing the widespread negative consequences many of us have experienced largely as a result of the immense restrictions imposed on our lives. However, bucking this trend, the growth of private client work offshore appears in some respects (and at least to date) to have continued on unaffected in any profoundly negative sense by this recent turmoil.
In fact, the impact of the pandemic on private clients has been the opposite: many have experienced increases in their personal wealth that have been nothing short of startling. According to the Global Wealth Report published by Credit Suisse in June 2021, more than five million people became millionaires across the world in 2020 despite economic damage from the Covid-19 pandemic. In addition, the report notes that the number of ultra-high net worth individuals, usually defined as those having investable assets of more than $30m, grew by 24% worldwide in 2020, the fastest rate of increase since 2003.
Experience dictates that the generation of immense personal wealth results in increased demand for professional services such as fiduciary appointments, and the private client industry in the Cayman Islands has seen this demand jump significantly. Official statistics published by the Cayman Islands General Registry in January 2021 showed that the number of new trusts registered in the jurisdiction grew in 2020. With trust business booming, it is interesting to take a closer look at exactly what types of trusts are being formed in the jurisdiction, and who is forming them.
Trusts in the Cayman Islands
Interestingly, tax mitigation is no longer the sole (or in many cases the primary) reason for the establishment of Cayman Islands trusts, and the reality is that the circumstances and needs of modern clients vary significantly. The following are just a few examples of the types of trusts being established in the Cayman Islands:
- Advisors in the jurisdiction continue to establish, on a regular basis, traditional discretionary family trusts designed primarily to assist ultra-high net worth individuals to structure their family wealth across generations and protect it well into the future. On this front, it is very common to see a family scenario involving a matriarch or patriarch who has built up a sizeable private company wishing to protect those business interests for future generations. Often, the individual may be content to handle his or her own investments during their lifetime but may be concerned about the ability of heirs to do so after their death. A discretionary trust is therefore established reserving investment powers to the settlor during his or her lifetime but providing that, on the death of the settlor, either a person nominated by the settlor or the trustees may assume responsibility for the investment of the trust fund and protect it well into the future for the next generation.
- Asset protection trusts also remain popular across the Cayman Islands, particularly for ultra-high net worth individuals who consider themselves to be at great risk from hostile and unfounded attacks from within their home jurisdiction based purely on their sizeable wealth. Settling assets on a Cayman Islands trust serves an important asset protection function for many settlors, so long as the trust is not established with the intention of defrauding creditors and the settlor does not reserve to himself unrestricted powers to revoke the trust. Structured carefully and with adherence to statutory disposition rules, a Cayman Islands discretionary family trust can serve to ensure that a settlor's assets are not available to strangers, and that the assets are protected in the event of family breakdown.
- A creature of Cayman Islands statute, the STAR trust continues to be popular both in the scenarios explained above but also for holding operating companies in such a way as to limit trustee involvement in the underlying business. Both discretionary trusts and STAR trusts continue to be popular in the commercial context, as a mechanism for conferring benefits and incentives on employees (e.g. employee benefit trusts and employee share option schemes), as a vehicle for the administration of pension funds; as a platform for investment funds allowing investors to spread risk by acquiring limited stakes in a large portfolio of investments (e.g. a unit trust) and as an 'orphaning' mechanism to hold assets 'off balance sheet', and in the creation of 'bankruptcy remote' structures.
- In a similar vein, the use of "pre-IPO" trusts, particularly for clients out of Asia, has skyrocketed. According to business data platform Statista, in 2020 there were there were 407 initial public offerings (IPOs) in the United States - a figure almost double that recorded in 2019. This bumper figure was largely influenced by the significant rise in the number of special purpose acquisition companies (SPACs) incorporated over the past twelve months. Broadly speaking, SPACs can be used to raise funds through an IPO with the proceeds subsequently invested into a target company via merger or acquisition. In some circumstances, STAR trusts (of which investors can be beneficiaries) have been used to hold the net proceeds of the IPO listing until the target company is found in order to reassure investors that their funds are sufficiently protected and appropriately managed by a professional trustee for the time being.
- Perhaps flowing in some part from the IPO work described above, structuring specialists in the Cayman islands are also seeing a significant increase in demand for trusts to hold "new wealth"; on this front, there is greater need for careful and considered advice as to how best to manage and protect newly generated wealth so that it is not immediately squandered or otherwise lost through inexperience or mismanagement. Advisors within the jurisdiction have seen clear growth in freshly minted clients, many of whom have not previously needed the assistance of private client advisors, now in a position of vulnerability and requiring urgent help on this front. It is in this scenario that the flexibility of Cayman Islands structures comes to the fore: starting off with a basic discretionary trust will provide immediate protection for a new client's wealth, while still allowing for the opportunity to grow and evolve the structure as the client becomes more comfortable with, and knowledgeable about, their options.
- Privacy remains an important consideration for the client base in the Cayman Islands for a variety of reasons including security concerns, and a large number of clients are seeking to establish family trusts to ensure that the true extent of their wealth is protected from public disclosure. Cayman Islands trusts are generally created by a private document to which the settlor, the trustees and any protector (if any) are the only parties. Importantly, the trust instrument does not have to be filed with any public body in the Cayman Islands, and information relating to the trust is not accessible by the general public. Of course, as part of global initiatives to improve tax compliance, the Cayman Islands is party to international agreements providing both for the automatic exchange and exchange upon request of information to relevant authorities and this is always taken into consideration as part of the structuring exercise.
- Finally, with many clients facing up to their mortality, Cayman Islands trusts are also increasingly being established as part of an estate planning exercise. New clients who have relocated to the islands and purchased real estate, boats, and other valuable property to support their new life in here find it helpful to have these new assets collected in a Cayman Islands trust with a view to dispensing with the need for drawn-out probate formalities in the event of their passing. Assets settled on the trust are then held for the benefit of succeeding generations in accordance with the terms of the trust instrument, and the death of the individual should have no detrimental consequences for the continued operation of the trust.
As can be seen from the above, the variety of modern forms of trusts available in the Cayman Islands, the protections they offer, and the flexibility with which they operate, ensures that the jurisdiction continues to attract a steady stream of trusts work from around the globe.
So, what does the future hold for the private wealth space in the Cayman Islands? As noted in the Global Wealth Report, the short-term consequences of the COVID-19 pandemic for wealth "confounded expectations", with personal wealth and wealth macroeconomic indicators appearing to be "on different trajectories". The report predicts a continued trend of growth in personal wealth, and this seems to be the trend reflected in the circumstances of the client base that is attracted to the Cayman Islands. Here, early signs are that growth will continue and at a steady pace particularly with immigration to the Cayman Islands becoming so popular among the ultra-high net worth set. As a result, trustees of Cayman Islands trusts can expect the administration of those trusts to be increasingly hands on and their mandates to widen significantly to include new service lines. Related to these developments, the need for wealth managers, relocation specialists, private bankers, commercial and residential property agents, among other skilled service providers, is significant and very much on the rise.
In terms of challenges, the regulatory burden for clients and trustees will undoubtedly continue to increase and trustees in particular will need to pay close attention to the ever-evolving requirements associated with, for example, anti-money laundering initiatives and regulations around economic substance and beneficial ownership. A growth in client attraction to, and investment in, new forms of assets such as digital assets may also introduce greater volatility into traditional structures and expose all involved to more risk. And, as clients and their business recalibrate to operate in a vastly changed global environment, private client advisors can expect new, interesting, and possibly very delicate situations to arise that require careful handling, good communication, and hard thinking.
As the old saying goes, change may be the only constant in the years ahead. But, having established a culture of flexibility and robustness already, the Cayman Islands private client industry continues to face a strong and vibrant future.
An original version of this article was first published by IFC Review, September 2021
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.