Responses for the Cayman Islands - David Pytches, Conyers Dill & Pearman
1. Is there any specific legislation which legitimises the retention of any powers by the settlor?
Yes, under Part III of the Trusts Law (as revised) (“TL”). Section 14 TL provides that the reservation or grant by a settlor of a trust of the powers listed therein shall not invalidate the trust of affect the presumption that the settlor intended the trust to take effect immediately on the property vesting in the trustees. Section 15 TL provides that a trustee acting in compliance with such a reserved power shall not be acting in breach of trust. It is thought that the list of reserved powers in Section 14 TL does not represent an exhaustive list of the powers which may be reserved by a settlor under a Cayman law trust.
2. What limits are there on the legitimacy of a Letter of Wishes and how are such instruments properly created and used?
Letters of wishes are commonly provided by settlors to the trustees of Cayman law trusts. They are generally stated to be confidential and for the purposes of guidance rather than imposing legally-binding obligations. Ordinarily, a letter of wishes would not be disclosed to beneficiaries, although the Court may order disclosure if there are good grounds to do so. For example, if a letter of wishes were to be overly prescriptive (or purport to have legally binding status), it is likely that it would be regarded as forming part of the terms of the trust itself and, therefore, properly disclosable to beneficiaries.
3. What have been the latest developments in trust law and regulation in the jurisdiction and what changes are planned or expected?
In 2008, the Private Trust Company Regulations, 2008 (“PTCR”) brought in a registered form of private trust company as an alternative to the existing licensed form (see response 5 below) .
In August 2009, the Cayman Islands was promoted to the OECD’s “white list” of countries which have substantially implemented the internationally agreed standards for transparency and exchange of information. To date, Cayman has entered into 20 bilateral TIEAs, most recently with Mexico, Canada and Germany.
On 1st November 2009, the Financial Services Division (“FSD”) of the Grand Court opened. The FSD came into being to deal with the ever-increasing volume of financial services cases in the jurisdiction. The emphasis is on providing more flexible and efficient case-management and three additional judges have been appointed to deal with the case load. In trusts and estates matters, certain cases must now be brought in the FSD, including:
· administration actions or applications under the TL, except those relating to local estates with assets under $1 million; and
· actions against a trustee or protector or an executor or administrator for breach of trust or breach of fiduciary duty, except those relating to trusts or estates with assets under $1 million.
A new Charities Bill was gazetted in June 2010. The principal object of the new law will be to regulate the operation of charities in the Cayman Islands by providing for a system of registration. The bill also aims to develop the law of charities in Cayman by providing definitions of “charity”, “charitable purpose” and “public benefit”.
4. Are private trust companies a feature of trusts in the jurisdiction and are there firms or organisations who could host such a private trust company?
Yes, two types of private trust company (“PTC”) exist in Cayman, a licensed form and a registered form. Both forms are commonly used and many professional service providers will host them.
5. Are there any particular laws relating to the setting up of a private trust company? If so, are there any precautions which should be taken to ensure that the trust remains valid?
A licensed PTC is a regulated entity operating under the terms of a restricted trust licence issued under the Banks and Trust Companies Law (as revised) (“BTCL”). The licence application is made to the Cayman Islands Monetary Authority (“CIMA”) and involves a thorough (and often lengthy) due diligence process on the personnel and business to be conducted.
The registered form of PTC was introduced by the PTCR. Provided the PTC complies with the requirements of the PTCR, it will not need to apply for a licence to carry on trust business under the BTCL. The requirements are:
· to maintain a registered office in Cayman at the office of a company which itself holds an unrestricted trust licence under the BTCL and to keep up-to-date trust records there;
· to register the name of the PTC with CIMA and file an annual declaration stating, inter alia, that the PTC is compliant with the PTCR;
· to pay an initial and then an annual registration fee;
· to conduct only “connected trust business”, that is, act as trustee of trusts whose settlors are connected by reference to relationships defined in the PTCR;
· to use the words PTC or private trust company in its name.
6. If the majority of trustees are resident outside the jurisdiction, is it necessary to have one of them, or an agent, resident in the jurisdiction?
There are no such residency requirements attaching to trusteeship of an ordinary Cayman law trust. Under Section 105 TL, the trustees of a STAR trust (being a trust subject to the Special Trusts – Alternative Regime at Part VIII of the TL) must be, or include, a company licensed to carry on trust business under the BTCL or a PTC registered under the PTCR.
7. Once a trust is set up, what access can the public or government, local or foreign, have to details of the parties involved in the trust or trust assets under OECD Exchange of Information agreements, double taxation treaties or mutual assistance agreements? Is information revealed to foreign tax authorities automatically or solely in response to enquiries properly made under these international agreements?
Generally, a trust is a private arrangement and information concerning the trust, the trust assets and the parties involved is not a matter of public record. Unauthorised disclosure of confidential information of this nature is an offence under the Confidential Relationships (Preservation) Law (as revised) (“CRPL”).
To date, Cayman has entered into 20 bilateral tax information exchange agreements with other countries pursuant to the Tax Information Authority Law (as revised) (“TIAL”). Exchange of information under these agreements is not automatic but made in response to proper requests submitted to the Tax Information Authority (“TIA”) in Cayman by its counterpart in another jurisdiction. Cayman also operates a unilateral exchange of information mechanism under the TIAL whereby confidential information may be disclosed by the TIA at the request of competent authorities in certain “Scheduled Countries” in order to assist in investigating civil and criminal tax matters.
Cayman has also entered into bilateral agreements with each of the EU member states in relation to the reporting of savings income information pursuant to the Reporting of Savings Income Information (European Union) Law (as revised) (“ROSIIL”). Reporting under the ROSIIL is automatic.
Disclosure of confidential information pursuant to a proper request under the TIAL or the ROSIIL is deemed not to be a breach of the CRPL.
In addition, CIMA has entered into a number of bi- and multilateral memoranda of understanding on exchange of information with its counterparts in other jurisdictions pursuant to the Monetary Authority Law (as revised).
8. What are the main types of trusts and their particular uses (for example, interest in possession, discretionary or accumulation and maintenance trusts)?
The majority of private trusts – trusts set up by private individuals for estate or tax planning reasons - are discretionary in nature. Many will contain extensive powers reserved to the settlor or a protector. Purpose trusts, either charitable or non-charitable, are commonly used to hold the shares of SPVs in commercial transactions or the voting shares of mutual funds. STAR trusts are regularly employed in a wide range of private, commercial and charitable or philanthropic structures.
9. Can any type of assets be placed in a trust (examples should be given of types of assets which may be included which are in addition to the normal range of cash, securities and land)?
There are few restrictions on the type of asset which may be settled in a Cayman law trust. Generally, Cayman law follows English law to the extent that all property, moveable or immovable, wherever situate, may be made the subject of a trust unless contrary to public policy or statute. Under Section 109 TL, no interest in land in the Cayman Islands may be held directly or indirectly in a STAR trust.
10. What are the formal requirements which are required such as certainty of intention of subject matter and of objects?
Cayman law follows English law with regard to the three certainties required to create a valid ordinary trust (certainty as to intention, subject matter and objects - as set out in Knight v Knight (1840) 3 Beav. 148).
Under Section 103 TL, a STAR trust will not be rendered void by uncertainty as to its objects or mode of execution. The terms of the trust may give any person the power to resolve such uncertainty and, subject to that, the Court may do so.
11. Following the previous question, are shams a danger in the jurisdiction and what are the consequences of an arrangement being declared a sham?
The principles of sham in Cayman law are the same as under English common law.
Section 13 TL speaks to certainty of intention insofar as, where a trust instrument is not expressed to be a will or any other form of testamentary disposition, a presumption automatically arises that the settlor intended to create a trust which took immediate effect upon the property vesting in the trustees.
Cayman’s reserved powers laws (discussed at point 1 above) seek to add clarity to the extent to which a settlor may retain control over trust property without rendering the arrangement a formal sham.
If an arrangement is found to be a sham, no trust exists over the property and it will be regarded as having belonged to the settlor throughout.
12. What is necessary to make a trust properly constituted, i.e., to make it active after the trust instrument has been signed; that is, to make the trust properly constituted? What are the consequences of this is not fulfilled?
Property in some form, albeit nominal, must be transferred to the trustees in order for a trust to exist. The settlor must do what is within his power to transfer legal title to the trust property to the trustees in order that the trust be properly constituted; if he does not, no trust will exist over the property.
The exception is where property is already vested in the trustees, i.e. where the settlor declares himself to be trustee of property which he already owns.
13. Can trusts be set up by a declaration by the settlor that he henceforth holds assets which he already owns on trust for someone else, hence becoming the trustee, or is it necessary that there should be a transfer of the settlors’ assets to the trustee accompanied by a written instrument by which the trustee undertakes to hold the assets for the beneficiaries?
A trust may be set up by a declaration of trust by the settlor, either orally or in writing; technically, no written instrument is required (except in the case of a unit trust or a STAR trust).
14. What powers are implied under the trust legislation to trustees and what powers need to be, and usually are, expressed in the trust instrument?
Trustees’ powers under the TL are based on, and in substantially similar form to, those contained in the English Trustee Act 1925; they are generally considered restrictive and will be extended expressly in the trust instrument.
The statutory power of investment will, typically, be overridden so as to confer a power equivalent to that of an absolute owner. It is also usual to see in the trust instrument, inter alia, wide express powers to borrow, to make loans to or provide security for beneficiaries, to delegate, to trade, to insure trust property, to apply capital as income and to give indemnities.
The statutory powers of maintenance and advancement at Sections 32 and 33 TL would usually be disapplied.
15. Can a settlor be appointed a trustee?
Yes.
16. Can a settlor be made a beneficiary?
Yes.
17. Are Protectors/Guardians usually incorporated into trusts in the jurisdiction; if so, what are the specific rules relating to them and, if none, how does the general law treat them?
Protectors, both individuals and committees, are widely used in Cayman law trusts. No statutory definition of Protector exists in Cayman law; the Protector’s role is created by the terms of the trust.
18. Do protectors/guardians have fiduciary responsibilities?
The law is not fixed in this area. Although a matter of construction in each case, generally, it will be presumed that a Protector’s powers and duties are fiduciary.
In the case of In re Circle Trust (Grand Ct.), 2006 CILR 323, it was held that the Grand Court had inherent jurisdiction to scrutinise the exercise of fiduciary powers by a Protector and to remove and replace him in the event that he failed exercise those powers properly.
19. To what extent do beneficiaries have any control over the trustees or over their appointment or dismissal?
Part II TL deals with the appointment and discharge of trustees. In the absence of any express provision in the trust deed, the power of appointing new trustees is exercisable by the continuing trustees.
20. Can beneficiaries indicate to the trustees how they wish the trust to be managed or may they terminate the trust when the law relating to such termination is fulfilled (such as under Saunders v Vautier)?
The settlor may grant management powers to beneficiaries under the terms of the trust if he thinks fit.
The rule in Saunders v Vautier applies to ordinary Cayman law trusts. The rule does not apply to STAR trusts - under Section 100 TL, a beneficiary of a STAR trust does not, as such, have standing to enforce the trust, or any enforceable right against the trustees or to the trust property.
21. What is the standard of care required under the law for trustees and what measures exist to ensure an appropriate level of performance?
There is no statutory duty of care in Cayman law. The English common law duty of care applies (Speight v Gaunt (1883) 22 Ch D 727; Bartlett v Barclays Bank Trust Co Ltd [1980] 1 All ER 139). The standard of care expected of a professional paid trustee will be higher than that of an unpaid lay trustee.
22. If a trustee fails to take an appropriate measure, what powers are there to correct the error which may be taken by the trustees, (e.g., by agreement with the beneficiaries) or with the consent of the court.
It may be possible to correct such an error by obtaining the consent of the beneficiaries, however, this would not (necessarily) be binding on third parties to the trust. To bind the world, it would be available to the trustees to apply to the Court under Section 48 TL for an “opinion, advice or direction” in relation to the matter. The rule in Hastings-Bass has been applied in the Cayman Court pursuant to a Section 48 application in order to correct a mistake on the part of a trustee - A v. Rothschild Trust Cayman Ltd. (Grand Ct.), 2004–05 CILR 485.
23. If the trustees fail to fulfil the general terms of their duties or the particular requirements in the trust instrument, what action may be taken by the settlor or by the trustees particularly with regard to the possible need for cross-frontier negotiation or litigation?
Absent any powers reserved to him under the terms of the trust, the settlor is likely to have very limited ability to take the trustees to task for failure to fulfil their duties. If the trustees’ failure results in loss to the trust fund, then, generally, a breach of trust action lies with the beneficiaries of the trust. In the case of a STAR trust, that action would lie not with beneficiaries but with the enforcer(s). Where the trust is governed by Cayman law, all questions arising in regard to the administration of the trust, wherever conducted, fall to be determined under Cayman law to the exclusion of the law of any other jurisdiction (Section 90 TL).
24. What are the limits that trustees may claim indemnity for costs and expenses of running the trust and opposing outside claims and is any procedure advisable before engaging in litigation (such as a Beddoe application)?
Section 47(2) TL provides a trustee with an implied indemnity to the extent that the trustee may reimburse itself out of the trust fund all expenses incurred in or about the execution of the trust. In addition, the trust instrument will usually contain an express form of indemnity permitting reimbursement for all liabilities other than those arising as a result of fraud, misconduct (or various synonyms thereof) or negligence on the part of the trustees. Whereas it is permissible for a trustee to exclude liability for negligence, a provision purporting to excuse liability for fraud would not be enforceable under Cayman law (the principles in the English case of Armitage v Nurse having been applied in Cayman in Lemos v. Coutts & Co. (Cayman) Ltd. (Grand Ct.), 2003 CILR 381).
A trustee must not make a profit out of its trusteeship unless this is expressly permitted under the terms of the trust. All professionally drafted trust deeds will incorporate a professional trustee charging clause.
It is possible for a trustee to make a Beddoe application prior to engaging in litigation.
25. Are the assets of a trust held by trustees considered in law to be separate from the trustee’s personal assets and thereby insulated from claims against the trustees’ personal creditors?
Yes.
26. On transfer of assets to the trustees, the settlor must arrange for the legal title of the assets to be transferred and undertake whatever transfer procedures are required by the place in which the assets are situated; if this transfer does not take place entirely as proposed when the trust is set up, does this affect the validity of the trust?
The rules on completely and incompletely constituted trusts under Cayman law are the same as those which apply in England and Wales. In order to constitute the trust, the settlor must do all that is in his power to vest the trust property in the trustees, taking into account the nature of the property concerned. If not properly constituted, no trust arises on the basis of the equitable maxim that “equity will not perfect an imperfect gift”.
27. What duty of care and other criteria are applied to the investment of trust funds? Can this duty be delegated by the trustees?
Section 35 TL sets out a list of authorised investments in which trustees may invest trust funds. Typically, the statutory power will be overridden by a statement in the trust deed conferring on the trustees all the powers of investment which would be available to an absolute beneficial owner. The common law duty of care applies to the exercise of investment powers; there is no equivalent in Cayman of the English Trustee Act 2000.
It is common for the settlor of a Cayman law trust to grant investment powers to a party other than the trustees under the terms of the trust deed. The trustees will have no discretion over how the trust fund is invested, but will act at the direction of that other party. Generally, under those circumstances, the trustees will be absolved from all responsibility for investment losses. This arrangement is expressly contemplated in Section 14(1)(e) TL whereby a settlor may reserve or grant to a third-party the power to give binding directions to the trustees in connection with the purchase, holding or sale of trust property.
Section 29 TL permits the trustees of a Cayman law trust to engage agents and delegate administrative function to them. It does not extend to the delegation of discretionary powers and so, typically, an express power of delegation will be included in the trust instrument. Generally, trustees will delegate investment functions to third-party managers.
Under Section 7 of the Powers of Attorney Law (as revised), a power of attorney granted by a trustee in respect of any of its functions is limited to a period not exceeding twelve months.
28. Can trusts migrate into or out of the jurisdiction and may they change their proper law?
There is no general restriction under Cayman law which would prevent a Cayman resident trustee from retiring in favour of a foreign trustee (or vice versa). The only exception is that, in the case of a STAR trust, the trustees must be, or include, a Cayman licensed trust corporation or a registered PTC (see response 6 above).
Under Section 89(4) TL, if the terms of the trust permit, the proper law of a trust may be changed to or from Cayman law provided that, in the case of a change to Cayman law, the change will be recognised under the previous governing law and, in the case of a change from Cayman law, the validity of the trust and the respective interests of the beneficiaries will be recognised under the new governing law. In the case of a STAR trust, a change from Cayman law will only be valid if the new governing law will recognise the validity of the trust without any material effect on its objects and the standing of the enforcer to enforce the trust.
29. Is the jurisdiction governed by the Hague Convention on the Recognition and Enforcement of Trusts and, if not, to what extent are foreign trusts recognised?
The jurisdiction of the Hague Convention has not been extended to the Cayman Islands. However, the concept of the trust is well-established in Cayman law and, generally, a trust which is validly existing under a foreign law will be recognised as such in Cayman.
30. What powers are there for beneficiaries to seek replacement of trustees?
A beneficiary of an ordinary Cayman law trust would have standing to apply to the Court for an order removing a trustee, either pursuant to Section 10 TL or under the Court’s inherent jurisdiction. Section 10 (equivalent to Section 41 of the English Trustee Act 1925) permits the Court to appoint a substitute trustee where it is expedient to do so
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