The Cayman Islands Trusts Law is in urgent need of modernization, particularly with regard to the treatment of U.S. beneficiaries of a trust, trust lawyers said at the Mourant Ozannes Trusts and Private Client Conference.
Shân Warnock-Smith, QC, co-chair of the event, said if there is a trend in the trust world and in her own private practice, it is the problem of how to restructure a trust to cater to the special requirements of U.S. beneficiaries under U.S. tax law.
In particular, the tax on the accumulation and distribution of trusts, also known as throwback tax, has the potential to completely eliminate the interests of U.S. beneficiaries when capital from a trust is distributed.
Ms. Warnock-Smith used the example at the same conference last year to distinguish between Cayman’s trust law and comparable legislation in Bermuda in the form of the Trustee Act.
While Cayman law allows a trustee to apply to the court to seek additional powers in the management and administration of a trust, the equivalent Bermuda law is framed differently and, to a degree, enables the variation of beneficial interests, she explained.
As a result, “in Bermuda you don’t have to have a full scale variation of trusts application.”
In Cayman it is possible to seek a power to partition the trust fund between various camps of beneficiaries so that the American beneficiaries have a sub trust and even a different trustee, but it does not allow the variation of beneficial interests.
“So if you want to do a complete job and change the trust for the American beneficiaries, then you have to go to Bermuda as matters presently stand, unless you want to do a full scale variation of trusts. [But] you don’t want to do a full scale variation of trusts because that requires the consent of adult beneficiaries and you don’t want your Americans consenting to the variation because then you run into the problem that it might be a disposition of interest for American tax purposes,” she said.
For trustees “the issue is a juggling act,” and Ms. Warnock-Smith regretted already last year that “Cayman’s statutory trust law had not come on in the way that we would have hoped over the last few years.
“We are still in that position this year. Nothing has changed,” she said.
Ms. Warnock-Smith added that she is not advocating copying Bermuda law because she has “grave doubts whether that is the appropriate way to go about it.”
“Nevertheless, there are some developments which we badly need to see in Cayman, which include some adjustments to the firewall legislation,” she said.
The second theme in the trust practice during the past year, Ms. Warnock-Smith said, is the potential for applications to set aside transactions on the grounds of mistake. Since the British Supreme Court in its decision Pitt vs. Holt narrowed the scope of a rule that allowed setting aside decisions by the trustee that had unforeseen consequences, often resulting in an unplanned tax liability, the profession has been searching for potential remedies across the various trust jurisdictions.
However, Ms. Warnock-Smith said, “In the immediate aftermath of Pitt and Holt there was all sorts of doom and gloom, but it is still quite possible to do all sorts of things to put right mistakes.”
The conference, held at The Ritz-Carlton, Grand Cayman on Oct. 2, dealt with a range of concerns for trustees.
The agenda included the best way to respond to tax information demands, anti-forced heirship provisions, and how the Cayman Islands firewall is now viewed in the market for foreign trusts, as well as how to protect a trustee from personal liability and what statutes can help.
“Professional trustees operating in the 21st century must negotiate an ever more onerous and complex environment,” said Jim Edmondson, head of International Trusts and Private Client at Mourant Ozannes and co-chair of the conference. “We have seen moves towards greater transparency of personal and financial information and a political agenda which questions the motives and morality of tax planning,” Mr. Edmondson said.
“These factors have complicated the duties of prudent investment, confidentiality and exercising independent judgment, while such issues as family disputes, divorce and aggressive tax regimes present significant risks to the preservation of value in trusts.”
The headline debate at the conference considered the right to privacy, with the forming view that in the current climate, the right to privacy is dead. Jeremy Wessels, partner with Mourant Ozannes in Guernsey and international head of litigation, said that neither the trustee nor the beneficiary of a trust can expect the affairs of the trust to be kept confidential.
“We have been faced with a tsunami of legislation which has greatly expanded the sphere of circumstance in which information must be compulsorily produced to authorities,” he said, citing cases of serious fraud, money laundering and tax investigations, as well as overseas criminal and regulatory probes.
“The right to privacy is not dead, but just a little bruised,” argued Joshua Rubenstein, partner with Katten Muchin Rosenman in New York. “We can compete and observe privacy for positive reasons and Cayman is a wonderful example of that,” he said, “based on the quality of the trust service, the quality of the talent, as well as the quality of the legislation, economic and political stability and a predictable and efficient judiciary.”
Succession matters and Brussels IV
Trusts and succession matters was the focus of the panel discussion, with U.K. and U.S. perspectives from Peter Steen of Mishcon de Reya and Megan Worrell of Duane Morris, respectively.
David Wallace Wilson of Schellenberg Wittmer outlined the changes introduced in the new EU succession legislation Brussels IV, which was based on the Swiss law. This legislation, dealing with the estates of deceased persons, has significant implications for Cayman structures with assets in EU member states, he said, or in matters where the client has elected in favor of an EU member state for their estate affairs to be settled.
“Brussels IV provides the ability for clients to choose the member state law applicable to their estate, regardless of their last habitual residence, and they can even select any other country for planning outside the EU, where they hold a passport,” Mr. Wallace Wilson said. “There is no requirement in the legislation for the ‘most connected nationality,’ which is also positive. Another new development is the introduction of inheritance contracts between spouses and heirs to finalize the estate, and these agreements can choose which probate court will be in charge of liquidating the estate.”
“While the U.K. has opted out of Brussels IV, it is still relevant for any client with both a U.K. connection and a European connection,” said Mishcon de Reya’s Steen, while Megan Worrell highlighted how the election of U.S. national law under Brussels IV adds complexity, because in the U.S. everything is very state specific. “I would need to look at which state my client had the most contact with and that is not always certain as there may be U.S. citizenship but no property, or property assets in multiple states,” she said. “Conflict of law issues may arise if New York, for example, doesn’t recognize Brussels IV. If the U.S. state concerned doesn’t have a clear-cut way of handling conflicts of law, then the estate could be pushed back to the EU, circumventing the clients’ choice.”
Trustees and bribes
Recent clarification from the English Supreme Court on the long-standing question of whether bribes received by an agent are held on trust for its principal featured in the discussion on Trustees, Bribes and Secret Profits. Cayman Islands Head of Litigation, Simon Dickson, along with Maxine Mossman of Clifford Chance, looked at the implications for t
rustees and beneficiaries of the 2014 decision in FRH European Ventures v Cedar Capital, which reversed a previous wrong turn in English law.
“The availability of a proprietary remedy, rather than just a personal remedy is most significant in the context of the fiduciary, which accepted the bribe, becoming insolvent,” Mr. Dickson said. “The proprietary claim would effectively give the beneficiaries priority over the fiduciary’s unsecured creditors, while additionally, the extended remedies of ancillary relief may be sought, such as proprietary injunctions to freeze bribes and their traceable proceeds.”