Individuals and companies based in the
MENA region did not escape investment losses during the global financial
crisis. As a result of recent turmoil, many families in the Middle East that
have traditionally maintained proprietary wealth are turning to structures that
include trusts to address succession planning and asset protection concerns.
Already widely used for corporate
purposes, Cayman is emerging as a popular choice for MENA families and
corporate groups looking to establish a trust. In addition to being familiar,
Cayman offers a politically stable and tax neutral jurisdiction with a
well-established common law system and sophisticated, modern trust legislation.
Cayman trusts are also widely used in the MENA region for Islamic finance transactions
and employee benefit schemes. This article examines how Cayman’s trust regime
may assist families and corporate groups to address certain issues that
frequently arise in the MENA region.
Meaning “path” in Arabic, Shari’a guides
all aspects of Muslim life including financial dealings and inheritance. The
Shari’a law of inheritance, mainly set out in the Koran, comprises an elaborate
system of “forced heirship” rules governing the devolution of property. Unlike
in many other parts of the world, assets in the MENA region are in great part
held personally rather than through companies. As a result, Shari’a generally
determines the division of property and sets out the shares to which family
members will be entitled and the order of precedence.
The effects of Shari’a laws of heirship
may be altered by the use of a Cayman trust. It is important to recognise that
clients in the MENA region typically do not wish to mitigate all aspects of
Shari’a when structuring a trust. Indeed, the trust deed often will be drafted
so as to ensure that, as far as possible, its terms, particularly those
governing the trustee’s choice of investments, are Shari’a compliant. It is
also common to see an Islamic scholar nominated in the trust deed to advise the
trustee on matters of Shari’a interpretation. However, in many cases a family
may determine that its interests will be served by an arrangement that
facilitates conservation and management of wealth by appropriate persons and/or
distributions of capital and income in shares that accord with varying
Assets settled into a trust by an
individual (known as the “settlor”) during his lifetime will remain outside his
personal estate upon death and will not fall to be distributed in accordance
with Shari’a law (save to the extent required by the trust deed). The trust
deed contains the terms of the trust, including the terms governing
distribution by the trustee of income and capital.
Typically, this will confer
wide discretion on the trustee. In addition to these terms, the settlor usually
will provide guidance in a separate letter of wishes, explaining how he would
expect the trustee to exercise its discretionary powers in favour of family and
any other beneficiaries or purposes of the trust. Alternatively, the settlor
may fix the beneficial interests under the trust in such manner as he considers
appropriate, including on the basis that some or all distributions are to be
made in shares determined in accordance with Shari’a. It is also quite usual to
appoint a “protector” under the trust deed. Generally a confidant of the
settlor or a professional person, the protector’s role is to ensure that the
trustee acts in accordance with the settlor’s wishes.
By these means, the settlor may
determine how he would like to have the trust income and capital distributed
rather than relying on Shari’a law. Since the trust is expressed to be governed
by Cayman law, all questions arising in relation to the trust, including the
capacity of the settlor to create the trust, the validity of the transfer of
assets to the trustee and the administration of the trust, will be determined
exclusively by Cayman law. Any party wishing to challenge the integrity of the
trust will have to do so in the Cayman courts applying Cayman law.
Further, Cayman law specifically
provides that no transfer of property into trust is liable to be set aside on
grounds that the laws of a foreign jurisdiction do not recognise trusts, or
that the trust was set up to defeat foreign heirship or other property rights.
A judgement of a foreign court which is inconsistent with these principles will
not be recognised in Cayman.
Family business succession
Recent articles in the MENA press
suggest that more than 80 per cent of businesses in the Middle East are family-run
or family-owned, with an estimated US$1 trillion expected to be handed down to
the next generation within the upcoming five to ten years, and with family
businesses controlling over 90 per cent of commercial activity in the region. A
2007 Ernst & Young survey of businesses in the Middle East revealed that 73
per cent of family businesses surveyed are run by second generation
entrepreneurs followed by first and third generation owners at 48 per cent and
20 per cent respectively. Astonishingly, only 16 per cent of companies have
admitted to having a well-defined succession and a clear ownership transition
plan. Succession planning, therefore, remains as one of the most significant
challenges facing Middle Eastern family businesses today.
Cayman “STAR” trusts can be particularly
useful to settlors in the context of business succession. This form of trust,
created under Cayman’s unique “Special Trusts – Alternative Regime”, provides a
flexible and robust structure that may be established for the benefit of
persons or purposes or both. The settlor may establish a trust with the dual
purposes of owning/operating the family business and providing for future
generations of his family. Through this structure, he may identify and prepare
his successor(s) and ensure that the business remains intact after his death.
Income may be ploughed back into the business or applied for the benefit of the
STAR trusts have the advantage of
perpetuity and confidentiality. There is no limit on the duration of a STAR trust.
This is attractive to the settlor who wishes to create a “dynasty” style trust.
He also may restrict the ability of the beneficiaries to challenge the trustee
or obtain information concerning the trust. The only party with legal standing
to enforce the trust or receive information about it is the “enforcer”
nominated by the settlor in the trust deed.
In addition to, or in conjunction with
STAR, the private trust company or “PTC” increasingly is being used by settlors
who wish to retain a greater degree of influence over the affairs of the trust.
Cayman offers two types of PTC: a fully licensed and regulated form and a
simpler, registered form. These enable the entrepreneurial settlor to
incorporate his own trust company to act as trustee of one or more connected
trusts. He, or other family members or trusted advisors, will then sit on the
board and take an active role in the trustee’s decision making process. This is
perceived as allowing for more flexible, dynamic (and, arguably, less risk
Cayman’s robust, but not overly
aggressive, creditor protection laws make it an attractive jurisdiction in
which to establish an asset protection trust. The legal framework is provided
by the Fraudulent Dispositions Law (as revised): this renders any transfer of
property voidable by a creditor if it is made at an undervalue and with intent
A gift into trust will usually be a
transaction for no consideration, and thus at an undervalue. “Intent to
defraud” means an intention wilfully to defeat an obligation owed to a creditor
which existed on or before the date of the transfer and of which the transferor
had notice. The burden of proof is placed squarely on the creditor seeking to
set aside the transfer. There is an ultimate limitation period of six years
from the date of the transfer into trust from which point any action to set it
aside will be timed out. The legislation is deliberately conservative – a six
year limitation period – rather than adopting the more adventurous approaches
taken by some other jurisdictions.
Use of trusts by companies
Cayman trusts are popular choices in
Islamic finance structures (eg sukuk). The Cayman Islands government has been
proactive in amending legislation to characterise sukuk structures as
“alternative financial investments” to facilitate the use of Cayman companies
and trust structures in Islamic finance without having to comply with the
regulatory requirements under the Mutual Funds Law and the Banks and Trust
As previously mentioned, in the Middle
East a significant number of companies are family owned. Often these companies
employ expatriates at the management level and wish to reward talented
employees and managers under share option or incentive plans. Companies operating
in the Middle East, however, face legal restrictions, including maintaining a
51 per cent local ownership requirement and restrictions on the ability to
issue varying share classes.
A Cayman STAR trust is a popular choice
for structuring share incentive plans for local free zone companies and local
non-government-owned companies. The trustee acquires a block of shares from the
company and/or existing shareholders. The trustee then arranges transfers of
shares forming that block between the trust and employees pursuant to the share
plan and the trust deed. The arrangement limits corporate obligations to issue
further shares to employees that could dilute the existing shareholders.
Further, use of a Cayman trust avoids the complexity and expense of having to
comply with corporate requirements for issuing, transferring and repurchasing
The concept of a trust does have its
place in the history of the Middle East. Wakf-alal-aulad, otherwise known as
Wakf, is a religious endowment in Islamic law for religious or charitable
purposes. The challenge now is to work with MENA clients to ensure that their
estate planning, business goals and religious concerns are addressed through
the establishment of an appropriate structure. It is a gradual process, but it
is encouraging to see the number of Middle Eastern families that are
recognising the value and flexibility that Cayman‘s trust regime has to offer.