Cayman trust practitioners have again highlighted their concerns over a “flight to Bermuda” in a key area of trust restructuring work, where they say statutory Cayman trust law has failed to evolve.
In front of a largely international audience at the Mourant Ozannes International Trusts & Private Client (ITPC) Conference, lawyers bemoaned the “perennial problem” of dealing with US beneficiaries when restructuring a trust, while looking at key market trends over the past year. The issue is now gaining greater significance, they said, and should now be a focus for Cayman legislators, because in order to provide a complete solution for US clients, the trust may need to be redomiciled to Bermuda, where the law is more accommodating.
“It has really been a case of wrestling with how to cater for the special requirements of US beneficiaries because of the accumulated distribution rules, or throwback tax as it sometimes called, which has the potential to eliminate completely the interests of US beneficiaries when capital is being distributed,” said Shân Warnock-Smith QC of ICT Chambers (Cayman) and 5 Stone Buildings – London. “It’s a real problem for trustees to determine the best course of action.”
In order to make the required changes to the trust, Warnock-Smith explained how Cayman law allows an application to be made to court to seek additional powers for the management of a trust, but Bermuda goes a stage further and enables the variation of beneficial interests to some degree.
“The point is that in Bermuda you don’t need a full Variation of Trust application, and although in Cayman we can seek power to partition the trust fund between various beneficiaries and perhaps create a sub-trust for US beneficiaries, perhaps with a different trustee, it doesn’t allow you to vary the beneficial interests,” she said. “So if you want to do a complete job and change the trust for US clients then you have to go to Bermuda, unless you want to do a full scale Variation of Trust in Cayman, which would require the consent of adult beneficiaries and you don’t want your American clients consenting to a variation because of the tax implications.”
With at least three cases from her desk this year changing governing law to Bermuda, Warnock-Smith said it was regrettable that Cayman statutory trust law has not developed as had been hoped. However, it is understood that the STEP Legislative Sub-Committee is actively considering these issues.
Speaking at the same event, Jude Scott, Chief Executive of Cayman Finance, said their role was to support the activities of STEP and help get these issues in front of the right people in government.
Part of their current focus, he added, involves supporting members of the industry in business development work across all industry sectors. For example, Cayman Finance recently helped BNY Mellon host a thought leadership event in Cayman and last week attended KPMG’s Island Infrastructure seminar in Miami, where the premier made a presentation.
Financial Services Minister Wayne Panton will also be speaking at the Managed Funds Association’s flagship event, Outlook 2015 in New York this week, with a conference spot on Understanding ‘Cayman Investment Opportunities’.
Later in October, Scott will attend the American Society for Healthcare Risk Management conference in Indianapolis, in support of IMAC (Insurance Managers Association of Cayman), which is important because healthcare groups in the US are the largest market for the Cayman captive insurance industry.
Scott said that Cayman Finance recognises the importance of continued reinvestment in our regulatory framework and our products.
“In order to meet the needs of our clients and remain the jurisdiction of choice we must innovate, evolve and move forward,” he said.