Volume XII, Number 1 – April 2003
© Donlevy-Rosen & Rosen, P.A.
INTRODUCTION. With this issue we continue our periodic review of selected offshore jurisdictions. These reviews cover such factors as the legal system, the geographic location, communications facilities, availability of professional services, and other items we deem pertinent. Some of the jurisdictions reviewed are regarded by us to be unsuitable for the establishment of an asset protection trust (APT), but will be included because they have either received publicity or promoted themselves as asset protection jurisdictions. As indicated by the above subtitle, in this issue we will review the Cayman Islands.
Described as being “one of the more mature jurisdictions … in terms of regulatory structure and culture”, the traditional impenetrable confidentiality of the Cayman Islands ended in late November 2001 when it signed a second Exchange of Tax Information Treaty with the United States. Among other things, that treaty gave the U.S. Internal Revenue Service permission to examine accounts of Cayman financial institutions.
Before we review Cayman Islands trust law, it is instructive to put it into context by briefly describing the legal theories commonly used by a settlor’s creditors in attempting to get at (reach) transfers of property to a trust: The Main One: That the transfer was done with the intent to hinder, delay, or defeat the creditor’s claim (a “fraudulent transfer” – for background, see, APN, Vol. I, No. 5 and Vol. IV, No. 4), and Two: That the settlor’s retained powers over the trust render the trust void (based on common law: since the trustee, not the settlor, is charged with the administration of the trust).
IMPORTANT LEGISLATION & RAMIFICATIONS. Cayman Islands trust law is comprised of several laws, the first of which was enacted in 1967, and the most recent of which was enacted in 2001. Taken together, and referred to in the aggregate in this newsletter for convenience (as the “Law”), one might conclude that it is focused more on trust administration rather than on any creditor protection which the trust might provide (In fairness, however, such an administrative focus is consistent with the Cayman’s status as a financial center.).First and foremost, the legislation of a potential APT jurisdiction must provide that a claimant will be unable to enforce a foreign (i.e., U.S.) judgment or apply foreign (i.e., U.S.) law in attempting to reach the assets of an offshore trust governed by the jurisdiction’s laws. Cayman Law satisfies this requirement. As a result of the inapplicability of the claimant’s “home” law, a claimant would only be able to attack a Cayman trust based on a fraudulent conveyance claim or an invalidity claim. The 2001 Law revision essentially eliminated the invalidity basis for attacking a Cayman trust by providing that the reservation by a settlor of a variety of trust powers and interests will not invalidate the trust. Thus, a fraudulent transfer assertion remains as the primary basis of attack.
In analyzing a fraudulent transfer law from an asset protection perspective, two important elements (but not the only ones) we evaluate are the standard of proof required to establish a fraudulent transfer and the statute of limitations within which a transfer may be challenged. On both of these important elements, the Law is unsatisfactory! Not only does it permit the use of the ordinary civil standard of proof (Compare: Cook Islands and Nevis: both require proof beyond a reasonable doubt), but its 6 year statute of limitations is longer than that usually found in the U.S. (generally 4 years). Thus, one would essentially be extending the statute of limitations on fraudulent transfers (in most cases) by utilizing a Cayman trust.
In addition, the Law is silent on the very important issue of the ramifications of the settlor being a beneficiary, i.e., whether a spendthrift provision would protect the settlor’s beneficial interest from his creditors (contrary to the traditional common law “non-protection” rule). Governing law must protect the settlor’s beneficial interest in the trust if the jurisdiction is to be viewed as an appropriate situs for an APT. Again: Cayman Law is deficient.
OTHER LEGISLATIVE ASPECTS. Under certain circumstances, it will be important for an APT to “move” from its original situs jurisdiction to a new jurisdiction. The Law provides for this, but unlike Nevis and Cook Islands law, does not have retroactive effect which is significant if the law being adopted (new jurisdiction) were more protective.
Under the Cayman Bankruptcy Law, in the event of the bankruptcy of the settlor, a transfer to a Cayman trust can be set aside as long as 10 years after the transfer, whereas in Nevis, for example, a settlor’s bankruptcy will not affect the validity of the settlor’s APT.
On a tax note, for those persons transferring community property to an APT, Cayman law, unlike that of Nevis and the Cook Islands, does not preserve the community property nature of the assets, thus eliminating the benefit of the “double” estate tax step-up in basis realized by owners of community property.
Finally, the Law prohibits the application of another country’s forced heirship law (which is important for settlors from civil law jurisdictions), and abolishes the common law rule against perpetuities, replacing it with a 150 year “wait and see” rule.
CONCLUSION. The Cayman Islands may be a suitable jurisdiction in which to establish a trust for purposes other than asset protection, but in our view, it should not be considered as an APT situs.