Estate planning for Asian clients in the Cayman Islands and the BVI

With an increase in Asian family wealth, it is no longer an option for Asian clients to avoid succession planning. In this article, we explore the solutions offered in the British Virgin Islands (BVI) and Cayman Islands, and how these options can be tailored to meet Asian clients’ needs.

Common concerns

Although offshore trust structures are a popular solution, many Asian clients still find the concept of a trust – a creature of common law – difficult to understand. Common concerns include relinquishing ownership and control, confidentiality, and costs. As a result of a simple lack of understanding, misleading information, or claims spread through the web and social media, Asian clients may request a specific type of trust in a certain jurisdiction without having sought preliminary tax or relevant legal advice, or to have unrealistic objectives for their proposed trust structure.

Wills

Asian clients with BVI assets who are uncomfortable with trust arrangements may instead opt to execute a will to ensure that their BVI estates are distributed according to their wishes. However, not all clients appreciate the advantages in having a BVI will (specifically governing their BVI assets) in addition to a foreign will (governing non-BVI assets). Many of them are unaware that the probate  process can be expedited with a BVI will, but have not been advised that forced heirship laws in their home jurisdiction may override a disposition by will.

Popular solutions in the BVI and Cayman Islands

The BVI and Cayman Islands are two of the most popular offshore trust jurisdictions for HNWIs, offering a number of solutions that can be tailored to address the needs of Asian clients. For example, trusts laws in both jurisdictions1 permit a wide range of powers to be reserved by a settlor of a trust (or granted to others, such as a protector) without affecting the trust’s validity. Reserving power to the settlor or a trusted associate or family member can go a long way to appease the concerns of Asian clients. However, reserving too much power might lead to a challenge to the trust in another jurisdiction2. In the BVI, the VISTA regime develops the reserved power provisions further by disengaging the trustee from the management of the underlying trust assets,  and removing the trustee’s fiduciary responsibility in respect of the
assets.

Private trust companies (PTCs) in the BVI and Cayman Islands offer particularly family-friendly solutions to Asian clients who are hesitant about transferring substantial wealth and control of the family business to a third party trustee, and concerned about the annual maintenance costs of a trust. However, PTCs tend to lose their appeal when clients are advised of the fiduciary duties and requisite standard of care imposed on PTCs, and the extra costs associated with a purpose trust or foundation holding the shares of the PTC3.

Asian clients who wish to set up trusts for specific purposes, e.g. the continuance of the family business, have found non-charitable purpose trusts in both jurisdictions4 appealing. STAR Trusts – a specific feature of the Cayman Islands – offer Asian clients another option for dynastic or multi-generational succession planning. The right to enforce the trust (i.e. to bring a claim against the trustee) is given to the enforcer alone5, which provides a certain level of comfort to Asian settlors concerned about disgruntled beneficiaries.  

Cayman Islands foundation company – the new solution?

Introduced by The Foundation Companies Law 2017, Cayman foundation companies (CFCs) offer Asian clients another alternative for succession planning. Unlike trusts, CFCs enjoy separate legal personality. Capable of existing indefinitely, the distinguishing features of CFCs are their orphaned nature, and the ability to entrench their objects.

Being an orphaned and ownerless entity, a CFC does not need to have members6 whose interests may conflict with the wishes of the founder, and payment of dividends is prohibited7. Unless expressly stated, the governing documents of a CFC cannot be amended8, thus ensuring that the intentions of the founder will not be frustrated following his or her incapacitation or death. These features aside, the fact that a CFC is a corporate body also appeals to Asian clients who may use a CFC to hold the family business, as the composition of the CFC can mirror the board of existing family enterprises. Like non-charitable purpose trusts in the BVI and STAR Trusts in the Cayman Islands, the purpose of a CFC can be hybrid, thus dispensing with the need for separate structures to further both charitable and non-charitable aims of the founder. As interested persons will owe their duty to the CFC and not to any potential beneficiaries, CFCs are also useful when the asset portfolio consists of high-risk and less diversified assets.

As with BVI and Cayman Islands trusts, assets placed into CFCs are protected by ‘firewall’ legislation9.

Whether CFCs are the new solution for Asian clients will, however, ultimately boil down to the preference and needs of the client. A CFC is capable of achieving many things that a trust can achieve and can be customised, but it also comes with certain requirements that may be perceived by Asian clients as shortcomings, such as registration on incorporation and annual government maintenance fees10.

Conclusion

Professional guidance and careful thought are required when it comes to estate planning. Whilst the BVI and Cayman Islands offer various solutions that can be tailored to meet Asian clients’ needs, deciding on which solution to employ is an intricate exercise of balancing the need to meet clients’ objectives with the need to manage their expectations. Being too accommodating to a client’s needs in retaining excessive control can jeopardise a trust, and the entrenchment of objectives can make a CFC too rigid to be an effective dynastic vehicle. Advisors must take a holistic approach in understanding and addressing each client’s concerns, and set parameters to ensure the integrity of the structure is not undermined. 

[1] BVI: Section 86 of the Trustee Act; Cayman Islands: Section 14 of the Trust Law

[2] JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev, 2017 EWHC 2426 Ch;

[3] For succession and tax purposes, it is recommended that the shares in PTCs be held in a standalone purpose trust or foundation; 

[4] BVI: section 84A of the Trustee Act – purposes must be specific reasonable and possible; must not be immoral, contrary to public policy or unlawful; Cayman: Part VIII of the Trusts Law (STAR trusts) – objects may be persons or purposes or both, and purposes may be of any number or kind, charitable or non-charitable, provided that they are lawful and not contrary to public policy;

[5] Section 100 of the Trusts Law

[6] Section 8 of The Foundation Companies Law 2017 (The FC Law); 

[7] Section 4 of The FC Law;

[8] Sections 9 and 10 of The FC Law; 

[9] Sections 92 and 93 of Trusts Law

[10] KYD700 (USD854).

 

This article was originally published by STEP Hong Kong Branch.