STEP

Title Research

The best of both worlds?

  • Author : Richard Grasby
  • Date : July 2010
ABOUT THE AUTHOR: Richard Grasby is an Associate Attorney at Maples and Calder, Hong Kong

A  s the proportion of global wealth owned by residents of Asia-Pacific is increasing1 so too is the interest in trust structures. People who have accrued, or are likely to accrue, large amounts of wealth are looking to establish trust structures for a variety of reasons. This article will briefly discuss some of the reasons and then look at how, specifically, a Cayman Islands STAR trust2 may be a good solution.

Asset protection

One possible reason for a would-be settlor to establish a trust is what is often described as asset protection. As more wealth is generated so is the likelihood of persons making a claim against such property – whether legitimately or not. A trust structure can, in certain circumstances, provide a legitimate buffer between the assets and the settlor. Whilst the Cayman Islands have taken a conservative position on asset, or creditor, protection trusts, a Cayman Islands trust does provide a certain degree of protection against claims. The main qualification is that Cayman Islands law will not protect against existing creditors and that Cayman Islands law offers no protection against assets that the settlor did not own outright.3 However, for a solvent settlor with no creditors, there are advantages in settling assets into a Cayman trust4. It should be noted that any interest which the settlor may retain under the trust may be capable of attachment by his creditors as property belonging to the settlor.

Preservation of confidentiality/anonymity

Assuming the wish for anonymity is for legitimate reasons (for example, reduction of kidnap risk for individual beneficiaries or desire for privacy in the case of charitable/philanthropic giving) and all other necessary disclosures are made (for example to revenue or regulatory authorities) then a Cayman Islands trust does offer considerable protection. As far as persons outside the trust are concerned, the Confidential Relationships Preservation Law (2009 Revision) makes it an offence for a trust company to divulge information save where compelled so to do. It should be noted that the Cayman Islands are party to 17 bilateral tax information exchange agreements and are members of various international bodies, which may result in certain information being exchanged. A STAR trust, however, also permits a settlor to restrict information rights to the beneficiaries. Only the enforcer has standing to enforce a special trust and therefore receive information. It remains open to the settlor for the trust deed to permit selected others (for example, adult beneficiaries) to receive information.

Succession planning

A Cayman Islands inter vivos trust can be especially useful to a domiciliary of a country with forced heirship rules who wants to benefit someone who would not otherwise benefit from his estate at all or to benefit his heirs in different proportions (or postpone the vesting of capital until the attainment of a different age) from that applicable under the relevant heirship rules.

The Trusts Law (see sections 89(2) and 90) provides that, if the trust contains a clause declaring that Cayman Islands law expressly governs the trust, Cayman Islands law will govern the trust regardless of any other circumstances and will determine all questions relating to the trust and to any disposition of property to the trustee without regard to the laws of any other jurisdiction5.

In addition, trusts established under the STAR regime are not subject to the rule against perpetuity restrictions and so are attractive for clients looking to establish dynastic style arrangements.

Taxation planning

There is no direct taxation in the Cayman Islands. Therefore investment and other profits can be realised free of tax in the Cayman Islands. There may of course be tax liabilities arising in other territories to which the settlor or any beneficiary has a connection (or where the settled property is situate) and separate advice should be taken in this regard.

Reserved powers

As many readers will be aware, it is not uncommon for would-be settlors to whom the above advantages (and indeed others) of a trust are attractive, to be reluctant to put pen to paper and establish a trust. Aside from cost, the main reason for such reluctance is often connected to an unwillingness to transfer ownership of the settled property into the name of the trustee. The perceived loss of control and the inability to continue to utilise the settlor’s entrepreneurial skills (often the reason for the acquisition of the settled wealth in the first place) further to enhance the trust property may be considered to outweigh the other advantages. Without being drawn into stereotypes, this is often more evident in certain cultures than others.

It has, however, always been possible for a settlor to reserve to himself or grant to another, powers over matters such as investment, although there remains little jurisprudence on this topic. The Cayman Islands was the first jurisdiction to place the matter beyond doubt by enacting legislation and that clarified the position and so provides a degree of comfort to those wishing to establish trusts, but not have the trustee interfere with matters such as investment. Indeed, there was a particular interest in such trusts for Asian-based settlors who were not attracted to the traditional approach of trustees to appoint one or more institutional investment managers and not allow family members to be appointed as investment manager.

Section 14 of the Trusts Law lists a number of powers and interests that a settlor can reserve or grant to himself or someone else. A common use of ‘reserved powers’ trusts is to enable the settlor, or someone he designates, to manage the investments of the trust. In this regard, two particular approaches are possible:

athe settlor or his designee (it may be a management committee) may be given the right to direct the trustee in matters of investment, with the trustee otherwise having all the rights, powers and duties of trust investment; orbthe investment function may (except where the trust holds Cayman Islands real estate directly or via a nominee or trust) be ‘carved out’ of the trustee’s responsibilities and functions. The trustee is then left with the dispositive functions, general administration duties and possibly the duty of custodianship of the trust assets. The settlor then confers on himself the right to give directions for the sale, purchase and management of the trust assets6.

There is also a risk that the trustee still has some residual fiduciary duties and therefore some obligation to oversee what a settlor or other third party (especially one without objective investment expertise) might be doing in managing the trust assets. Does this mean that there are certain circumstances where a trustee has a duty to intervene or not comply with a direction? There is still very little case law on this and, consequently, a fair degree of uncertainty as to the extent of any such duty. The position where a trustee may need to intervene, and a management committee look over its shoulder in case the trustee decides it must intervene is neither an attractive nor an efficient one for settlor and trustee alike.

STAR and reserved powers

This concern of residual obligation has lead to the latest development in the balance between trustee protection and settlor ‘control’ as to investment matters. In summary, a trust structure containing typical ‘reserved powers’ language, but being subject to the STAR trust provisions.

Such a trust would be structured such that:

  • investment management decisions are left to an investment committee (this can include the settlor);
  • the management of the investments by the committee is stated to be a purpose of the trust;
  • the purposes of the STAR trust – including therefore management of the investments by the committee – are only enforceable by the enforcer7 and not by the trustee.
  • There must be an information flow on investment activity between the committee and the enforcer.

This combination of factors should be sufficient to remove any duty of the trustee to monitor the investment decisions made by the committee.

In this regard, a trustee should be more willing to take on the trusteeship of a trust where investment powers are vested in others without being concerned at how such investment powers are being exercised. At the same time, a settlor can ensure that the investment management of the settled assets is managed by those persons chosen by the settlor, free from interference from the trustee. Along with the other advantages of STAR trusts, this is an arrangement in which settlors and trustees alike should be interested.

The 2009 Capgemini and Merrill Lynch World Wealth Report predicts that the number of HNWIs resident in Asia Pacific will exceed that of North America by 2013.
A trust to which Part VIII of the Trusts Law (2009 Revision) of the Cayman Islands applies.
Section 7 of the Fraudulent Dispositions Law 1996 of the Cayman Islands states that: “Nothing in this Law shall validate any disposition of property which is neither owned by the transferor nor the subject of a power in that behalf vested in the transferor and nor does this Law affect the recognition of foreign laws in determining whether the transferor is the owner of such property or the holder of such power.”
The settlor should settle Cayman situs assets for optimum protection.
As regards dispositions, where the disposition in question is governed by the laws of another jurisdiction (e.g. shares in a non-Cayman Islands company), the laws of that jurisdiction will prevail. That is why it is recommended that settlors settle Cayman Islands situs assets.
While it appears that these rights might be conferred in a non-fiduciary capacity, to do so could in certain circumstances weaken the integrity of the structure in terms of increasing the risk of its challenge as a ‘sham’ or illusory trust. It is therefore common to require that such provisions must be exercised in good faith and may not be exercised so as to confer specific benefit on the holder of the power.
The enforcer is a person designated for the purpose and under the STAR legislation is the sole person (to the exclusion of the usual rights of beneficiaries) that is entitled and able to enforce the trust. Obviously, the enforcer must not be a member of the committee.

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