Setting up a Trust in Cayman Islands

The Cayman Islands
Introduction

The Cayman Islands, a British Overseas Territory, maintain a significant degree of internal self-governance, despite having a UK-appointed Governor. While the United Kingdom oversees matters such as defense, internal security, and foreign affairs, it also appoints key public officials, including members of the judiciary. The Cayman Islands boast a well-established and highly experienced court system, which has been rigorously tested in complex trust and commercial litigation.

Government policy permits litigants to select legal representation of their choice, and it is common for distinguished King’s Counsel from London to appear before the Cayman Grand Court. The highest appellate authority remains the Privy Council in London.

The jurisdiction benefits from a strong professional services sector, with legal and accounting firms recruiting experts from leading global financial centers, ensuring a high standard of trust administration. Additionally, many trust companies in the Cayman Islands operate as subsidiaries of major financial institutions, including prominent Canadian, British, and Swiss banks.

With advanced communication networks, state-of-the-art information technology, and highly automated systems, the Cayman Islands ensure seamless interaction with onshore clients, eliminating potential delays when working with offshore service providers.

Understanding the Trust Concept

A trust is a legally recognized arrangement in which an individual, known as the settlor, transfers assets to another party, the trustee. The trustee holds legal ownership of these assets, not for personal gain, but for the benefit of designated individuals (the beneficiaries, who may include the settlor) or for a specific purpose.

The settlor’s instructions regarding the management and distribution of the trust assets are typically outlined in a formal document known as the trust instrument. This document serves to clarify the rights and responsibilities of all parties involved, ensuring transparency between the settlor, trustee, and beneficiaries. It also grants the trustee authority to administer the trust assets in compliance with the trust’s terms and the legal obligations imposed by statute.

Beyond the trust instrument, a settlor may also communicate preferences regarding the administration and future distribution of the trust assets in a more informal manner. This guidance is often documented in a letter of wishes. While not legally binding, such a letter is generally regarded as influential and may be taken into account by the trustee when making decisions, such as distributing assets from the trust fund.

The legal framework governing trusts in the Cayman Islands is primarily defined by the Trusts Act (2021 Revision), along with the Fraudulent Dispositions Act (1996 Revision) and the Perpetuities Act (1999 Revision).

Under the Trusts Act, Cayman courts have the authority to amend a trust in specific situations and maintain supervisory jurisdiction over trusts governed by Cayman law. Additionally, English case law serves as a highly persuasive reference in Cayman legal proceedings.

Key Elements of a Trust

The Settlor
Once a trust is established, the settlor relinquishes legal ownership of the assets transferred into the trust. While the settlor can be named as a beneficiary and, in some cases, serve as a co-trustee, they must genuinely divest themselves of control over the trust assets. Retaining certain powers, such as approving distributions, appointing or removing trustees, or revoking the trust, is possible; however, to ensure the trust’s validity, the settlor cannot simultaneously be both the sole trustee and sole beneficiary.

The Trustee
The trustee holds legal title to the trust assets and is responsible for managing and administering the trust in accordance with its terms. A trustee does not need to be a resident of the Cayman Islands, although this may be preferable when operating under Cayman law.

The trustee’s key responsibilities include:

• Administering the trust fairly and diligently in the best interests of all beneficiaries.
• Maintaining accurate records and accounts of all distributions and trust-related decisions.
• Taking an active role in trust management rather than merely following external instructions.
• Investing trust assets prudently and in accordance with authorized investment guidelines.

The Beneficiaries
Beneficiaries are the individuals or entities entitled to benefit from the trust assets. The settlor may be included as a beneficiary, provided there is sufficient certainty in defining the class of beneficiaries. A trust instrument can grant the power to add or exclude beneficiaries, allowing flexibility in determining who benefits from the trust. Depending on the type of trust, beneficiaries may receive equal or varying shares of the trust assets, as outlined in the trust instrument or at the trustee’s discretion in the case of a discretionary trust. In some cases, instead of naming specific beneficiaries, a trust may be established for designated purposes, as allowed under specialized trust structures.

The Trust Fund
The trust fund consists of the assets placed under the trust, which can include any form of movable or immovable property. However, certain types of trusts, such as Special Trusts, are restricted from directly holding land in the Cayman Islands. Additional assets may be added to the trust over time, and it is common practice to create a trust with a nominal initial contribution before transferring substantial assets later.

The Protector
A trust structure may include a protector, whose role is to provide oversight and an additional layer of control over the trustee’s actions. The protector may be required to approve key trustee decisions or, in some cases, issue directives to the trustee. Additionally, the protector may have the authority to remove or appoint trustees. Choosing a protector is as important as selecting a trustee. Typically, the settlor appoints one or more individuals they trust. However, the issue of long-term continuity should be considered, particularly in the event of the protector’s death or incapacitation.

Cayman Islands
Common Types of Cayman Trusts

The Cayman Islands offers a variety of trust structures designed to meet different estate planning, asset protection, and business objectives. Below are the most commonly used trust types in the jurisdiction:

Discretionary Trust
One of the most flexible trust structures.
Trustees have wide discretion over the distribution of income and capital to beneficiaries.
Beneficiaries do not have a fixed entitlement but only a right to be considered when trustees make decisions.
Commonly used for wealth management, succession planning, and asset protection.

Fixed Interest Trust
Beneficiaries are granted fixed rights to income or capital distributions.
Trustees have limited discretion in managing distributions.
Often used in estate planning to ensure orderly wealth transfer according to predetermined terms.
Commonly structured for pension schemes or family inheritance planning.

STAR Trust (Special Trusts Alternative Regime)
Introduced by the Special Trusts (Alternative Regime) Law, 1997.
Allows trusts to be created for both beneficiaries and purposes, including charitable and non-charitable objectives.
A designated enforcer is responsible for ensuring the trustees carry out the trust’s purpose.
Frequently used in commercial transactions, private wealth structuring, and securitization.
Can last indefinitely, unlike traditional trusts that are subject to the rule against perpetuities.

Charitable Trust
Established exclusively for charitable purposes, such as poverty relief, education, religion, or other public benefits.
Must meet the public benefit test to qualify under Cayman law.
Can exist in perpetuity without being subject to the rule against perpetuities.
Often used for philanthropy and corporate social responsibility (CSR) initiatives.

Trusts with Protectors
A protector (an individual, committee, or corporate entity) is appointed to oversee trustees.
The protector may hold powers such as:
Approving trustee decisions.
Removing and appointing trustees.
Vetoing distributions or amendments to the trust.
Adds an extra layer of control, often used in family wealth planning and corporate trusts.

Reserved Powers Trust
The settlor retains specific powers over the trust, such as:
The ability to amend or revoke the trust.
The right to control investment decisions.
The power to appoint or remove trustees and beneficiaries.
Offers greater control while still benefiting from asset protection and tax planning advantages.
Requires careful structuring to avoid adverse tax consequences in certain jurisdictions.

Exempted Trust
Must be registered with the Registrar of Trusts in the Cayman Islands.
Entitled to a tax exemption certificate guaranteeing that the trust will not be subject to future estate duty or inheritance taxes for up to 50 years.
Commonly used for offshore investment funds, unit trusts, and international estate planning.

Private Trust Companies (PTCs)
A corporate entity formed to act as a trustee for a specific family or business trust.
Provides greater control and confidentiality over trust administration.
Often used for high-net-worth families or complex business succession planning.
Requires registration under the Private Trust Companies Regulations (PTCR).

Cayman Islands Trusts
Key Uses and Applications

A trust is a legal arrangement in which an individual (the settlor) transfers assets (the trust fund) to one or more trustees. The trustees hold legal ownership of these assets and manage them for the benefit of designated individuals (beneficiaries) or for a specified purpose.

Trusts in the Cayman Islands are widely utilized for a variety of personal, financial, estate, and corporate planning objectives. The jurisdiction’s robust legal framework, strong asset protection features, and tax neutrality make it an attractive option for individuals and businesses worldwide. Their common uses are:

Estate Planning & Wealth Preservation
Provides structured succession planning to ensure smooth transfer of wealth to future generations. Helps avoid probate proceedings, ensuring efficient asset distribution upon the settlor’s passing. Protects family wealth from forced heirship laws that may apply in civil law jurisdictions.

Asset Protection
Shields assets from creditors, lawsuits, and political instability in the settlor’s home country. The Fraudulent Dispositions Act restricts claims against trust assets, provided the trust was not created with the intent to defraud. Protects assets from potential spousal claims in divorce proceedings (subject to certain legal considerations).

Tax Efficiency & Planning
Cayman trusts are structured to minimize estate, inheritance, capital gains, and income tax liabilities in certain jurisdictions. Offers tax neutrality, with no local taxes imposed on income, capital gains, or distributions. Can be integrated into international tax planning strategies for high-net-worth individuals and multinational corporations.

Philanthropy & Charitable Giving
Charitable trusts allow individuals and organizations to establish long-term philanthropic initiatives. Provides a structured vehicle to support charitable causes while ensuring compliance with recognized charitable purposes under Cayman law.

Commercial & Investment Structures
Commonly used in investment fund structures to hold assets for investors while ensuring independent governance. STAR trusts are frequently used in securitization, structured finance, and private equity transactions, allowing for purpose-driven asset management. Used in joint ventures and corporate financing to hold security for lenders in complex financial arrangements.

Pension & Employee Benefit Schemes
Often utilized to establish pension funds, employee stock ownership plans (ESOPs), and incentive schemes for corporations. Allows for structured long-term wealth accumulation and efficient distribution of retirement benefits.

Holding & Managing Specific Assets
Can be used to own real estate, intellectual property, yachts, aircraft, and other high-value assets.

Cayman Trusts offer confidential ownership and structured succession planning for valuable personal and business assets.

Establishing a Cayman Islands Trust

Establishing a trust in the Cayman Islands involves several key steps and considerations to ensure compliance with local laws and the settlor’s objectives. Below is an overview of the process:

Selecting the Type of Trust
The settlor must determine the most suitable trust structure based on their goals.

Appointing Key Parties
Settlor – The person transferring assets into the trust.
Trustee – Holds legal title to the assets and manages the trust in accordance with its terms. This can be an individual or a licensed trust company.
Beneficiaries – The individuals or entities benefiting from the trust.
Protector (if applicable) – Provides oversight on trustee decisions, often holding powers such as trustee appointment or removal.

Drafting the Trust Instrument
A formal legal document, the trust deed, outlines:

• The trust’s objectives.
• Duties and powers of the trustee.
• Beneficiary rights and entitlements.
• Investment and asset management guidelines.
• A letter of wishes may also be prepared, providing non-binding guidance to the trustee on the settlor’s preferences.

Funding the Trust
Assets, which can include cash, real estate, securities, and other investments, are transferred into the trust by the settlor. Additional contributions can be made over time.

Compliance and Registration (if applicable)

• Most Cayman trusts do not require registration. However, Exempted Trusts must be registered with the Cayman Islands Registrar of Trusts and can receive a tax exemption certificate for up to 50 years.
• Trustees must maintain accurate records and comply with anti-money laundering (AML) regulations.

It is preferable for a trust to be created by the execution of a formal written instrument so that all parties will know exactly what their respective rights and duties are. The Trusts Act does, however, permit a trust to come into existence by oral declaration or by conduct.

Trusts created in writing may be either a Settlement of Trust signed by both the settlor and the trustee, or by a Declaration of Trust signed by the trustee alone. Following execution of the trust instrument a trust will come into existence upon settlement of the initial property, which may be supplemented later. Ogier is able to assist with preparation of all of the appropriate documentation.

Administration and Management
The trustee must manage the trust according to its terms, legal obligations, and in the best interests of the beneficiaries. This includes:

• Record-keeping and reporting.
• Investment management.
• Asset distribution in line with the trust deed.

The Cayman Islands’ strong legal framework, privacy protections, and tax neutrality make it an attractive jurisdiction for trust formation. If you need assistance setting up a Cayman trust, consulting a legal or financial professional is recommended.

Why Choose Cayman Islands for Trust Formation?

Flexible Trust Structures – Offers discretionary trusts, fixed interest trusts, STAR trusts, and private trust companies (PTCs).
Strong Asset Protection Laws – Prohibits forced heirship claims and provides safeguards against creditor claims.
Tax Neutrality – No direct taxation on trusts or their beneficiaries
Well-Regulated Jurisdiction – Governed by the Trusts Act (2021 Revision) and supervised by the Cayman Islands Monetary Authority (CIMA).
Confidentiality – No public registration requirements for most trusts, ensuring privacy and discretion.

Confidentiality

The Cayman Islands imposes no public registration or disclosure requirements for the establishment of trusts, except in cases involving exempted trusts. However, information disclosure may be required under anti-money laundering regulations and international treaties related to financial transparency.

Taxation and Stamp Duty

The Cayman Islands do not impose taxes on corporations, capital gains, income, profits, or withholdings. Additionally, upon registration, the government provides an official guarantee that no taxes will be levied on the trust for a period of 50 years. This tax exemption can typically be renewed once the initial term expires. Otherwise, trusts are generally not subject to mandatory registration.

Key Legal Considerations

Impact of Foreign Laws
Unless explicitly stated otherwise in the trust deed, any legal issues concerning a trust governed by Cayman Islands law must be resolved in accordance with Cayman law, without reference to foreign jurisdictions that may have a connection to the trust or its assets. This applies to matters such as:

• The legal capacity of the settlor
• The validity, interpretation, and effect of the trust or asset transfer
• The trust’s administration, including the powers, duties, liabilities, and rights of trustees, as well as their appointment and removal
• The existence and scope of powers related to the trust’s amendment, revocation, or appointment

A trust established under Cayman law, or any transfer of assets to such a trust, cannot be invalidated on the grounds that:

• Another jurisdiction does not recognize or permit trusts
• The trust or transfer interferes with forced heirship rights granted under foreign laws

Rule Against Perpetuities
While STAR trusts and charitable trusts in the Cayman Islands can exist indefinitely, other types of trusts formed after August 1, 1995, are subject to the Perpetuities Act. This legislation sets a maximum trust duration of 150 years, with the option for the settlor to specify a shorter period. The Act also introduces a “wait and see” provision, which ensures that a trust is not automatically invalidated for exceeding the perpetuity limit unless it is definitively established that the assets will not vest within the permitted timeframe.

Regulations Governing Cayman Trustees

Licensing of Trust Companies
Any trust company operating in or from the Cayman Islands must obtain a license under the Banks and Trust Companies Act (BTCA). To qualify, applicants must meet minimum net worth requirements and be managed by individuals deemed fit and proper to operate in the industry. The Cayman Islands Monetary Authority (CIMA) oversees the licensing process, offering different categories of trust licenses, including unrestricted, restricted, and nominee licenses.

The licensing framework is designed to uphold the Cayman Islands’ reputation as a trusted and well-regulated financial jurisdiction. Applications must be submitted to CIMA using the prescribed forms and must comply with the regulatory standards set forth by the jurisdiction.

Private Trust Companies
A private trust company (PTC) is a corporate entity established solely to serve as a trustee for a specific trust or a group of related trusts.

These companies are governed by the BTCA and the Private Trust Companies Regulations (PTCR). While the general rule under the BTCA requires companies to obtain a trust license before engaging in trust-related activities, a PTC may qualify for an exemption if it satisfies certain regulatory requirements outlined in the PTCR.

For additional details, refer to Conyers’ publication on Private Trust Companies in the Cayman Islands.