Introduction of Cayman Islands Trusts
The Cayman Islands is a well-established trust jurisdiction. It has a modern trust legislation and an effective judicial system. Cayman law is derived from English common law, as supplemented by the Trusts Act (2021 Revision) (the “Trust Act?. The Trust Act provides flexibility and high level of protection for the trust related parties which makes the Cayman Islands a competitive jurisdiction to establish a trust. The Trust Act is supported by a body of case law from the Cayman courts.
There are no gift tax, estate tax, corporation tax, income tax or capital tax in the Cayman Islands for individuals or companies.
A Cayman Islands Trust may be created by a Trust Instrument setting out the terms of the trust in which the settlor transfers the assets to the trustee on trust for the benefit of the beneficiaries.
The Settlor of the trust is the owner of the assets who settled the assets into a trust. The professional corporate Trustee is the company which is the legal owner of the trust assets. The Trustee has the power to hold, administer and distribute the trust assets in accordance with the terms of the trust. The Trustee holds the trust assets for the benefit of the beneficiaries of the trust. The Settlor can be one of the beneficiaries but he cannot be the sole beneficiary of the trust.
Benefits of a trust：
- Succession planning: the Trustee can hold the trust assets and distribute the trust assets to the beneficiaries in accordance with the terms of the Trust Deed. The Settlor may give a letter of wishes as a guidance regarding the timing, amount and manner of distribution to the Trustee. The Trustee can hold the shares of a family business for concentration of shareholding of family business and to ensure that the family business can pass to future generations.
- Asset protection: by transferring the assets to the trust, the Settlor segregating the trust assets with his own assets, protect the trust assets from creditor’s claims provided that the intention of setting up a trust is not to defraud creditors and the Settlor does not reserve to himself unrestricted powers to revoke the trust, a trust can serve as an important asset protection functions. In addition, the trustee can appoint the spouses of the descendants as excluded persons of the trust who cannot benefit from the trust. The Trustee may cease to make distribution to the beneficiaries who have the risk of divorce.
- Avoidance of probate: assets owned by an individual usually pass on death in accordance with the terms of a will. If the assets are held in a wide variety of countries, it may be necessary to obtain a grant of probate with respect to the will in each country where assets are located. This can be an onerous, lengthy and costly process which can last between six months to two years. Moreover, there may be estate duties and taxes payable before the estate can be settled and the assets distributed to the heirs of the deceased. If such assets are settled on trust, the trust can enable the trust assets to be passed on future generations smoothly and according to the wishes of the settlor.
- Tax planning: During the existence of the trust, under the current tax regulations of Hong Kong, Singapore, Cayman Islands, British Virgin Islands, and Jersey, there is no tax reporting obligation for the income generated by the trust assets. However, when a beneficiary receives a trust distribution, there may be tax reporting obligations depending on the tax residency status of that beneficiary. Trust can be used to protect or exclude property settlements for UK inheritance tax purposes and foreign grantor trusts for US tax purposes.
- Avoidance of forced heirship rules: to guarantee that the trust assets can be distributed to the beneficiaries according to the wishes of the Settlor. An individual from a country with rigid legal or religious inheritance laws may implement a scheme of distribution of assets among his heirs that differs from that prescribed by his domiciliary law. By establishing a trust in common law jurisdictions such as Hong Kong, Cayman Islands, British Virgin Islands, Jersey and Guernsey, the desired distribution plan can often be implemented.
- Confidentiality: a trust does not need to be registered and it is a private legal arrangement between the Settlor and the Trustee. The information relating to the trust is not accessible by the general public.
- Philanthropy: a trust can be set up for charitable purpose in which the beneficiary of a trust can includes charitable organizations or for charitable purposes.
- Commercial uses such as Employee Benefits Trust.
Different kinds of Cayman Islands Trusts:
Discretionary Trust:
A discretionary trust is the most common type of trusts which gives the trustees wide powers to administer the assets and to distribute the assets to the discretionary beneficiaries at their discretion. The trustees will usually be guided by a non-legally binding letter of wishes from the settlor setting out wishes of the settlor regarding the manner in which the trust fund is to be administered and distributed. The letter of wishes can be updated from time to time. A Cayman Trust can exist for 150 years under Cayman Law.
Reserved Powers Trust:
The Settlors of Cayman Islands Trust may reserve certain powers as shown below to themselves or confer the powers on the Protector, without invalidating the trust:
1. Power to add or remove trustees;
2. Power to add or remove beneficiary or alter the class of beneficiaries; and
3. Power to give investment direction to the Trustee regarding the investment of the trust fund.
The above are special features of Cayman Islands Trust as the Settlors of Hong Kong Trust and Singapore Trust can only reserve investment powers to the Settlor. A Trustee who complies with the valid exercise of the reserved powers will not be in breach of trust.
The Settlors of Cayman Islands Trust may also reserve the powers as shown below to themselves or confer the powers on the Protector:
1. Power to vary, amend or revoke the trust instrument;
2. Power of appointment of income or capital of the trust fund;
3. Power to act as a director of the companies held under the trust; and
4. Power to change the governing law or forum of administration.
Purpose Trust:
The Special Trusts (Alternative Regime) (STAR) may be created in the Cayman Islands for a specific purpose or for the benefit of an identifiable group or class of beneficiary. STAR Trust can be set up for charitable and non-charitable purpose trusts, it can be a hybrid trust for both purposes and persons which may exist indefinitely. The enforcer who is appointed by the terms of the trust is the one who is able to enforce a STAR Trust. Beneficiaries can be enforcers who may have a right or a duty to enforce a trust, and there must be at least one enforcer for a STAR Trust. At least one of the trustees of a STAR must be a licensed trust company or registered as a private trust company in Cayman.
STAR Trusts can be used for the following purposes:
- To hold shares in a private trust company;
- To hold shares in operating companies. Since the management of the business is left to the directors of the operating company, the trustee has limited involvement in the management of the business;
- For philanthropic objects; and
- To exclude or restrict the beneficiaries?rights to information in order to encourage the beneficiaries work hard for their own living and prevent difficult beneficiaries consuming the trust assets by making claims to the trust assets.
Cayman Private Trust Company
Private Trust Companies incorporated in Cayman Islands does not require a Restricted Trust License from the Cayman Islands Monetary Authority (“CIMA?. The Private Trust Company requires a licenced trust company in the Cayman Islands to provide its registered office in the Cayman Islands. The name of the Private Trust Company needs to include “Private Trust Company?or “PTC?in its name. A Private Trust Company carries on connected trust business with related parties.
The advantages of private trust companies are that they give for settlors and other family members or trusted professional advisers to be involved in and to control the decision-making of the trustee entity, and to maintain high degree of confidentiality for more sensitive clients.
Limitation Period and Protection against creditor
Pursuant to The Fraudulent Dispositions Law, if a creditor can show that the transfer was made with an intent to defraud the creditor and at an undervalue within six years of settlement of the trust assets into the trust, the transfer can be set aside. No legal actions may be brought under the statute after six years limitation period.
Reference:
Cayman Islands Trusts Act (2021 Revision)
The Fraudulent Dispositions Law
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