The Cayman Islands urgently needs to update and innovate its trust law to maintain its international competitiveness, according to speakers at the Mourant Ozannes International Trusts and Private Client Conference.
Morven McMillan, partner at Mourant Ozannes, said Cayman should improve on its existing legislative framework for trusts. “We can’t afford to lag behind and we can’t rely solely on our courts here to keep us on the cutting edge of international trusts law in order to maintain the Cayman Islands position in the international world of trust and private client work.”
She said Cayman needs to develop its trust law to keep pace with changes in international business.
“This is not just about being reactive; and, of course, it has been very tough in the last few years in particular to adapt quickly to changes in international standards of information exchange and fiscal transparency. What I am talking about is pushing for further innovation,” she said.
Her conference co-moderator Shan Warnock-Smith Q.C. agreed, noting that Cayman had been a trailblazer in terms of trust legislation, for example with the creation of STAR trusts. Since then, competing jurisdictions have copied what Cayman conceived first.
“The issue now is the extent to which Cayman responds to promotions elsewhere, particularly in the IFCs, to develop suites of legislation which go much further than the classic trust legislation,” she said.
Cayman has “a difficult sell at the moment” because it had done “almost nothing” to develop its trust legislation further, Ms. Warnock-Smith noted. “Now it is becoming a bit of an issue.”
Advising against rushing into new legislation only because jurisdictions like Bermuda or Jersey had forged ahead, she said there are some conventional aspects of Cayman’s law that need “finessing.”
Since the U.K. Supreme Court effectively restricted so-called Hastings Bass applications, which enabled a court to set aside decisions by a trustee that were erroneous because they took into account irrelevant factors or ignored relevant ones, often resulting in unforeseen tax liabilities, Jersey and Bermuda introduced statutes allowing its courts to revert a trustee’s mistakes.
In Cayman, Ms. Warnock-Smith said, the chief justice had indicated extra-judicially that in suitable cases Hastings Bass applications could still proceed but that remains to be tested in court.
“If that’s right, then of course there is nothing needed in terms of legislative change but if that’s not right, and there are a number of cases out there where one would hope it would be tested fairly quickly, then that’s the sort of legislation that perhaps we ought to be considering.”
In addition, there was the question if Cayman needs to engage in more ambitious legislative amendments.
Some of the practical problems arising from the implementation of the U.S. Foreign Account Tax Compliance Act are that fixed interest trusts attract more reporting requirements than discretionary trusts.
This is not only an issue for U.S. beneficiaries but may also have consequences, such as unwanted publicity, for those who are not otherwise exposed to U.S. tax, Ms. Warnock-Smith said.
To turn a fixed trust into a discretionary trust requires court approval, an exercise that may be especially difficult in cases where beneficiaries cannot speak for themselves. Bermuda legislation allows variations of beneficial interest without the beneficiaries’ consent if the court is satisfied that the measure is “expedient.”
Ms. Warnock-Smith said she was “skeptical” about the application of the law and Bermuda had been “adventurous” in its construction of the scope of its law because the statute in question was designed to accommodate changes in management and administration, but not beneficial interest.
Nevertheless it had made Bermuda an attractive destination because it provided a practical solution to a common problem.
“The question for Cayman is should we do something to encourage people to stay in Cayman, to convince Cayman trustee’s not to change their proper law and move to Bermuda […] and allow them the opportunity to do something more adventurous here.”
She concluded that there are “conventional changes” to the trust law that need to be made and “adventurous changes” that need to be considered “as a matter of urgency because these are problems we are encountering on an every-day-basis.”