Offshore trusts will remain important estate planning tool

The trust concept will remain an important tool in the offshore world despite existing criticisms, according to the Chief Justice of the Cayman Islands Anthony Smellie.  

Speaking at the Mourant Ozannes Trust and Private Client Conference at The Ritz Carlton, Grand Cayman on Friday, 5 October, he said, “[I]n my view, the trust concept remains and will remain a legitimate and important estate and succession planning tool, in the panoply of options available in the world of international finance.” The chief justice sketched the evolution of trust structures and recent case law, saying that one reason for giving his key note speech was to “speak to the truth and substance” of Cayman’s fiscal regulatory position and “disabuse misinformation” disseminated in the mainstream media and by overseas regulators. 

Following the financial crisis, he said, a consensus seems to have emerged that requires offshore jurisdictions to promote their efforts to strengthen regulation and fiscal responsibility and change the expectation of those who wish to do business offshore.  

Central to this debate is the utility of the trust and “the fact that the concept of the trust is inherently malleable”, the chief justice said. “Its ability to adapt to changing social and economic circumstances, without altering its ‘irreducible core’, is central to the notion of what a trust has been since inception.”  

The flexibility of the trust concept has over time led to the modernisation of trust law, particularly in international financial centres, and new forms, such as non-charitable purpose trusts, known in Cayman as STAR trusts.  

This development in turn has given rise to a new debate about whether the core concept of the trust has been left too far behind in response to commercial demands, Justice Smellie noted. “But at the end of that debate what matters most is certainty … in the application of the legal principle and confidence in the infrastructure of the court system in the Cayman Islands. These are key to the continuing success of the jurisdiction.  

“In the same way that confidence in legislative developments such as STAR, is strengthened by mature debate and careful deliberation, the credibility, durability and strength of the trust concept is further supported by its frequent examination and the application by the Cayman Islands Courts of the principles of equity and of precedent-based case law,” he added. 

Quoting Harvard Professor Austin Wakeman Scott, Mr. Smellie also referred to the “darker side of the picture” and the use of trusts as a tool for evading or breaking the law.  

However, he deplored that it is often the dominant way in which the offshore trust world is perceived or described. In 2006, for instance, a United States Senate investigation produced the report “Tax haven abuses: The enablers, the tools and secrecy”, which questioned the independence of trustees and stated that financial secrecy laws in offshore tax havens are used to obscure financial transactions with unfair results under US tax and security laws. US Senator Carl Levin, meanwhile, has stated “the law should assume that every transaction taking place in a tax haven is a sham”. 

The chief justice also noted the scepticism of trusts in the courts of the US in certain claims brought by the Internal Revenue Service and regulators or in bankruptcy proceedings. Against this backdrop, he explained, the courts in the Cayman Islands have to undertake a “balancing exercise”. 

There is a “fine balance between, on the one hand, individuals who may wish to protect their assets legitimately or who may seek to minimise their tax bills in compliance with their local tax laws, and, on the other, creditors, including government revenue agencies, who wish to recover debts or revenues owed to them and, of course, the obligation to co-operate in the fight against international crime,” he said. 

The balancing act also extends to the concept of confidentiality, which is not absolute but subject to numerous exceptions in line with the Cayman Islands’ international obligations in relation to the investigation of criminal offences, tax information exchange, regulatory matters and the vindication of rights in civil proceedings.  

While there will remains room for conflicts of law issues in the future, “particularly in view of the stated intention of regulators outside the Cayman Islands to assert their jurisdiction over disputes relating to, amongst other structures, Cayman Islands trusts”, the chief justice nonetheless said he believes the trust concept will remain viable. 

The Mourant Ozannes Trust and Private Client Conference attracted 140 practitioners and featured a range of presentations on various aspects of trust management and litigation. 


Chief Justice Anthony Smellie speaks at the Mourant Ozannes Trusts and Private Client Conference. – Photo: Submitted

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