Safe Harbor: Protecting and Preserving Wealth with the Trusts and Endowment Companies of the Cayman Islands – Wealth Management
The economic, political and social upheaval that has visited so many countries in the past few months has forced many wealthy families to focus on their longer-term financial plans. The desire to protect and preserve family and corporate assets, and to streamline and centralize administration and administration in a well-run, well-regulated and secure jurisdiction, has resulted in a significant increase in business for the Cayman Islands financial sector with a renewed movement of wealth in Cayman structures and, in certain cases, the relocation of the family itself to the islands.
Traditionally, asset protection has meant strategies that allow an individual or a company to restrict creditors’ access to property in accordance with applicable debtor / creditor laws. Over the past two decades, the protection of offshore trusts and foundations has become more sophisticated, and while mitigating litigation and bankruptcy risk remains a legitimate concern for many clients, a much wider range of defenses are available.
This article looks specifically at Cayman Islands Trusts and Foundation Companies (“FCs”) and the different types of protection they can offer.
Sale of ownership and reservation of control
The formation of a trust involves a party (known as a “settlor”) who places assets under the control of a trustee in order to hold them for the benefit of certain persons (known as “beneficiaries”) or to fulfill certain purposes. The formation of an FC involves a party (known as a “founder”) who involves the FC and then transfers ownership to the FC which is managed by the board of directors and proposed for its properties.
Much of the protection gained by a trust or an FC rests on the simple fact that the settler or founder is no longer the legal owner of the property in the structure: legal ownership of the property is transferred from the settler to a trustee or transferred by the founder of the FC, so that the property is no longer part of their personal estate. From that point onwards, subject to the principles set out below, the assets will be protected against the settler’s or founder’s personal creditors, will not be subject to the mandatory inheritance rules that may apply to their estate, and will be outside the succession rules of any jurisdiction.
However, relinquishing legal ownership does not mean relinquishing all control over the property of the trust or the FC or the ability to benefit from or enjoy it. Cayman Law contains extensive provisions for “reserved powers” that allow settlers or third parties appointed by them to maintain a significant degree of control over the management, investment, and distribution of the trust assets. In the case of an FC, the founder may sit on the company’s board of directors or be appointed manager of the company and in that capacity continue to make decisions or influence how the FC’s property is administered and applied. In either case, the settler or founder can be a beneficiary.
Protection from future creditors
A person with no existing claims against them and with no reasonably foreseeable claims in the pipeline can transfer assets to a Cayman Trustee or FC confident that, in the worst case scenario, those assets will be secured against the claims of future creditors.
Cayman’s main law protecting creditors, the Fraudulent Ordinance Act (as amended), was enacted over thirty years ago. It contains a two-pronged test that a creditor must pass to prevent a transfer of property to a trust or FC on the grounds that they have been defrauded by them. The obligee must provide evidence that (i) the transfer was of undervalued value (ie, it was a gift or a substantial discount); and (ii) the transferor acted with the intent to cheat (that is, it was on the transferor’s mind to place or attempt to place assets out of the reach of a known creditor or someone he should have known a creditor be). A limitation period of six years applies to every claim.
Protection from foreign inheritance and other laws
A trust or FC can help preserve family and corporate assets for future generations and avoid the fragmentation caused by mandatory inheritance rules under foreign legal systems.
Forced inheritance in various forms applies in many civil and sharia law countries: the rules vary, but as a rule an individual’s ability to dispose of property freely after death is limited to only part of his estate, with the rest being limited to divided into two parts is prescribed heirs. Clawback can be used to reclaim gifts that a person has given during their lifetime.
The Cayman Law, on the other hand, hardly restricts an individual’s freedom to dispose of his property at his own discretion during his lifetime and after death. This extends to the transfer of ownership to a trust or FC. In addition, Cayman Law will actively protect this transmission through legal rules known as a “firewall”. The firewall precludes the application of all foreign law in determining matters such as the validity of a trust, the validity of a transfer of assets in a trust, the capacity of the transferor, and the trustee’s management of the trust – all of these questions are negligible Determine Cayman Law. Likewise, no trust or transfer of property to a trust will be canceled because the law of another country does not recognize the concept of trust or because the arrangement violates the laws of inheritance of that country. The same applies to a transfer of ownership to an FC (and company)
generally). A judgment of a foreign court that contradicts these principles will not be recognized or enforced by the courts of the Cayman Islands.
The practical effect of the firewall is that anyone who wishes to void an asset transfer to a Cayman trust or FC because they violate or deny their rights under the laws of inheritance of another jurisdiction should bring the case to the Cayman court must negotiate Apply firewall principles.
A note of caution. The physical location of assets is an important consideration for any asset protection structure: assets should be kept as far as possible outside of jurisdictions where there is a significant risk of attack. Technically, Cayman’s firewall applies wherever trust or FC ownership is located. However, if that property is outside the Cayman Islands and there is a successful lawsuit against the Trust or FC in the courts of that jurisdiction, there may be little that the trustee, the directors of the FC, or the Cayman Court can do to protect it.
Dealing with family disputes
The settlor of a trust established under the Cayman STAR Act can limit or waive the enforcement and information rights of all beneficiaries of the trust, thereby avoiding unwanted costs, disruption and advertising
through frivolous legal proceedings filed by fragile beneficiaries or warring family members.
In general, any beneficiary of a trust (other than a STAR trust) has a qualified right to obtain information about the trust and legal status in order to seek court enforcement of the trust’s terms. These rights are the means by which the beneficiary’s interest in the trust is protected and the trustee held accountable.
Cayman’s 1997 STAR Act introduced a variation on this general principle. STAR permits the settlor of a trust to transfer all enforcement and information rights (which would otherwise belong to the beneficiaries) to one or more “enforcers” of the trust. The enforcers, who may or may not be beneficiaries, are the only persons who have these rights, and consequently it becomes possible for the settler to withhold enforcement and information rights from any beneficiary he believes is abusing them. The trustee remains fully responsible for his actions, but to the executor and not to the beneficiaries.
With regard to an FC, the situation is similar, if not more robust: Unless the Constitution provides otherwise, a beneficiary has no powers or rights in relation to the FC, its management or assets, and no right to receive reports and accounts or other information about the business and affairs of the FC.
Avoid unwanted advertisements
The automatic exchange of information is now a fact. Even so, Cayman Trusts and FCs offer a high level of privacy to customers who are concerned that the impact on them and their families has been the extent of their personal wealth to be publicly known.
A Cayman Trust Deed is a private document. Trust documents and the information they contain do not appear on any register in the Cayman Islands. The trustees of the trust are required to keep the affairs of the trust and all personal information relating to the beneficiaries confidential. Under the STAR Act (as shown above) it is also possible to restrict a beneficiary’s access to trust documents and information. The only publicly available information regarding an FC is the date of incorporation, company number, whether it is active or dissolved, the address of its registered office and the names of the current directors. The constitutional documents are not available to the public.
The circumstances of every settler or founder are different. This article describes the legal protections under Cayman law, but tailored precautions can be taken to address specific situations. Walkers’ Private Capital & Trusts team specializes in bespoke offshore structures that are tailored to the practical needs of families and businesses and help them maintain, apply and grow their wealth over generations. We would be happy to discuss the options with you.
The content of this article is intended to provide general guidance on the subject. A professional should be consulted about your particular circumstances.