There is a growing trend for Cayman Islands trusts to be used in commercial transactions, not just as a standalone vehicles, but also as part of complex structures. There is a selection of situations where trusts are being used in a commercial context to provide flexible solutions for corporate clients. In the Cayman Islands there is a choice of the type of trust – a common law trust with its origins in English common law, or a 'star' trust, which is a statutory purpose trust.
The star trust is named from the legislation that introduced it, the Special Trusts (Alternative Regime) Law, and although it is now consolidated in the Trusts Law, the name has stuck.
Star trusts can be for purposes only or a mix of purposes and beneficiaries. Rights given to beneficiaries under common law trusts are given to an 'enforcer' – for example, it is the enforcer who would bring an action against a trustee for breach of trust, not the beneficiaries. Given the status of enforcer and beneficiaries, under a star trust beneficiaries do not have the same rights to information as under a common law trust, although in practice clients often choose to provide information to beneficiaries in a commercial context. Under a star trust there is no perpetuity period.
Unit trusts are popular investment fund vehicles and the decision to create a unit trust is often determined as the result of tax and legal advice in the client's home country. Generally, unit trusts can be tailored more closely to the client's requirements than a
corporate or partnership vehicle, which are subject to detailed and rigid legislation.
The structure we see most often involves the trustee creating the unit trust by a declaration of trust. The declaration of trust contains provisions about how units are issued, transferred, redeemed and valued. It also details the powers, duties and discretions of the trustee.
Clients view the identity of the service providers as an important feature for unit trusts, which is a factor investors consider when deciding whether to purchase. The exact services required are considered carefully in the structuring process and may be referred to in the declaration. Information about the providers and material terms of their contract with the trustee are disclosed in the offering document. The trust service providers usually include administrators, registrar and transfer agents, investment managers and/or advisers and custodians.
A unit trust investment fund can be structured with the aim of segregating the assets and liabilities of different investment strategies or investors.
Unit trusts are a popular vehicle for the Japanese market and public offerings of Cayman Islands unit trusts in Japan are common.
It is often the case that trusts are needed that enable the trustee to hold shares. In the investment fund context, a corporate fund could issue investors with non-voting (or limited voting) participating shares and attach the voting rights to non-participating management shares. Sometimes, the promoter does not wish to hold, or cannot hold, such management shares. Star trusts are ideal for trustees to hold shares.
Structured finance transactions
A share trust is used in certain structured finance transactions to effect 'off-balance sheet' financing. These transactions often include the incorporation of a Cayman Islands company that issues one class of shares. All the shares are issued to the trustee with the parties involved being beneficiaries. These transactions may also involve the creation of a trust to hold the shares of a company forming the sole investment of the trust assets.
Traditionally, such transactions used a charitable trust vehicle. As star trusts can be used to hold assets for the purpose of a transaction, and can be tailored to meet the requirements of a transaction, they are used increasingly.
Note trusts and securitisation transactions
Trusts are used in transactions to enable a trustee to issue debt – for example, as part of a securitisation transaction. In a securitisation transaction, a company – usually a Cayman Islands special purpose vehicle – receives a stream of income as part of a larger transaction. These assets are settled on trust and the trustee issues notes and holds the assets for the benefit of the noteholders.
Often, Cayman Islands trusts that mimic other entities are needed. Sometimes this is because the client wishes to use a particular structure that for various reasons it cannot use in its home country, for example a US voting trust. Such voting trusts are used in an insolvency context.
Employee benefit trusts
Cayman Islands trusts are used to provide global employee benefits, which can be an attractive incentive to retain employees.
Many employees work in several countries during their careers. Even when they remain with the same employer, working in different jurisdictions can create difficulties for employers who wish to provide their employees with a remuneration package that includes pension benefits. Such employees may not qualify for social security benefits in the countries where they work, or seldom remain long enough to accumulate they significant benefits and may not be eligible to participate their employer's primary retirement arrangements.
A Cayman Islands pension trust can be used to provide benefits for the employees in different countries. The employer may need to comply with the mandatory pension provisions in the employee's country of employment and the trust can be used to provide additional benefits. It can be tailored to mirror or supplement primary pension arrangements so that the employer can seek to standardise the benefits it provides. Such trusts can also be used to provide additional benefits for executives.
There is a strong trust industry in the Cayman Islands providing an attractive jurisdiction for substantial transactions. Most of the major global trustee and trust service companies and big accounting firms have a presence in the Cayman Islands. It is likely that Cayman Islands trusts will remain popular vehicles for transactions and will be used in ever more creative ways.
Grant Stein is a partner and Elisa Gatti an associate at Cayman Islands firm Walkers