Latin Americans find Cayman Trusts a natural fit

Read our article in the Cayman Financial Review Magazine, eversion 

  

 With such an increase in trade cross border, there is the opportunity for
individuals in Central and South America and those in the Far East for that
matter, to place their private companies in trusts and have the growth of their
business within the asset protection, estate planning trust.  

Why
do individuals in Central and South America look to establish trusts?
 

There is a need for
high net-worth Latin Americans to protect their assets in this growing economic
environment and to be able to access financial instruments they would not
normally be able to participate in from their home jurisdiction. Below I have
highlighted eight reasons why Latin Americans choose to establish a trust
outside of their home country:  

Holding assets in a controlled inflation environment (Latin America has
historically encountered high inflation, lowering the real value of assets).  

Freedom from forced heirship rules in their home jurisdiction.  

Political stability   

Confidentiality (the risk of kidnapping is more significant in some
Latin American countries and being able to store wealth outside of the country
of residence provides greater confidentiality of one’s net worth)  

Safeguards against money laundering – The level of anti money laundering
monitoring is very high within the Cayman Islands.  

Sophisticated banking and trust facilities – The Cayman Islands legal
framework ensures clients can have peace of mind when establishing a trust
within the Cayman Islands  

Ability to access a wider range of investments
that can generate greater returns with a lower risk than within Latin America.  

Trust legislation that allows an element of control and management of
the assets.  

It is well known
that Latin America follows civil law and as such the idea of a trust, based on
common law principles is not always fully understood by wealthy individuals in
Latin America when this is first suggested. In addition there is a desire for
the patriarch or matriarch to retain some involvement in the management of
assets. There are three reasons why Cayman accommodates the needs for such an
individual when establishing a trust, all of which are enacted in law: 

  • Trusts with reserved powers  
  • STAR trusts  
  • Private Trust Company legislation  

The following is a
synopsis of the benefits of each of the above:  

Reserved
powers trusts
 

The Cayman Islands
adopted amendments to its Trust Law in 1998 to deal with potential claims of
“invalid testamentary dispositions” or more commonly referred to as “sham
trusts”. The amendment to the law lists a number of specific powers, the
reservation or grant of any or all of which will not invalidate the trust or
affect the presumption of lifetime effect. What does this mean – well from a
Latin American perspective, legitimately reserving certain powers can provide a
mechanism to establish a trust but also to retain some involvement in the
assets held in the trust. For example: 

The power to revoke, vary or amend the trust instrument or the power to
appoint, add or remove any trustee, protector or beneficiary. The settlor has
the ability to ensure they are satisfied with the overall oversight of the
structure and have the ability to change the management of the trust if
necessary.  

There are other powers such as the power to act as a director or officer
of any company owned by the trust that can allow the settlor to perhaps add
their family operating company to the trust and also have some oversight on the
management of the business. With the recent upturn in growth in the Latin
American countries, more individuals wish to not only have their tradable
investment portfolios held in trusts but also their privately held operating
companies.  

Others may choose to have the power to give the trustee binding
directions in relation to the investment of trust property. Settlors may wish
to have oversight on how the wealth settled into the trust is managed and the
reservation of this power allows them to do so.  

There are additional
powers that can be reserved but this is by way of a sample to demonstrate the
appeal for Latin American’s allowing greater flexibility within a Cayman trust
which can be attractive for the Latin American market.  

The
Special Trusts (Alternative Regime) Law (STAR)
 

This was enacted in
1997 and can offer a favourable alternative solution to clients within Latin
America. On the basis that beneficiaries are not named but the trust is
established for a purpose, the ability for a beneficiary to take action against
the trust is diminished. This is of particular benefit when dealing with forced
heirship on the basis that for an ordinary person trust beneficiaries within
the jurisdiction of the forced heirship regime may be vulnerable to compulsion
by the heirs. In a STAR trust beneficiaries are not named and it is only the
enforcer that has powers to enforce the trust. For some, the STAR trust can be
a complicated vehicle but it has many facets that make it an attractive
proposition.  

A STAR trust can
also be a suitable solution when a settlor wishes to benefit his family on the
one hand but also wishes to achieve some other objective, such as the
development of his business interests. In a standard persons trust, as and when
beneficiaries attain maturity, they could put pressure on the trustees to sell
the private business and to focus on more standard investible assets. Also the
trustee would need to be mindful of the risks associated with a private
business held in a standard trust and be concerned that retaining the asset
could lead to legal action against them by the other beneficiaries if it does
not grow in value in line with more orthodox investments.  

A STAR trust could
hold all of the components of a family’s wealth, normally each class of asset
being in a separate corporate entity owned by the STAR trust. In a STAR trust
the only person who can take action against the trustee is the enforcer. See
Figure 1.  

This type of
structure would allow a business person in Latin America to secure all their
assets in a trust, whilst also retaining control of the family business and
without the risk of the beneficiaries having the ability to force the sale of
that business in the future. 

Private
Trust Company (PTC)
 

In 2008 there was an
amendment to the Cayman Islands Banks and Trust Companies Law, enacting the
Private Trust Companies Law. As the growth of high net worth individuals and
entrepreneurs in Latin America has increased dramatically, the opportunity to
hold ones wealth through a trust can be an appealing solution. Again we return
to the question of control and in particular whether a trustee would be comfortable
holding assets of an actively managed business in a trust. The idea of
establishing a PTC gives an individual the ability to hold assets they wish to
hold through their trusts but without an Institutional trustee, who may not be
comfortable with the actively managed business activities being held in a
trust. The directors of a PTC are normally the settlor or close family members,
along with a trusted legal advisor and a professional trustee. The board of the
PTC would meet regularly each year to oversee the trusts established and the
PTC can hold trusts from just one person or also close relatives can establish
trusts within the PTC.  

Figure 2 is a
structure chart of how the Cayman PTC is managed and controlled. In this
example there is one family member settling trusts but various close family
members can also settle trusts within the same PTC. 

It is always important for
an individual to give consideration to their reporting obligations in their
country of residence when determining the best way forward for an offshore
structure that works for them but within the Cayman Trust legislation are the
tools necessary to make the jurisdiction an ideal location. With the
accelerated growth of high net worth individuals in Latin America, there are
opportunities for them to consider Cayman as an ideal location to establish
Trust structures. Legislation in Cayman has particular interest for those
individuals who also want to legitimately retain an element of control over the
management of the assets within a Trust structure whilst not invalidating the
testamentary dispositions and risk their structure being considered a “sham”.

 Fig1Ff 

 fig2f
 

fig 2