Latin American families: Planning for a smooth transmission of Cayman shares

It is not uncommon for individuals domiciled in Latin America to own shares in a Cayman Islands company, whether for tax planning purposes, diversification of investments or otherwise.

A question that is increasingly posed by such individuals is the following: What happens when I die, and, in particular, what system of laws will apply to the succession of those shares?

The foreign element provisions of Cayman’s Trusts Law

One option is to settle the shares on a Cayman Islands trust during the individual’s lifetime. Although this is one of the more costly alternatives, settling the shares on a Cayman trust does avoid the need to obtain a grant of probate or other grant of representation in order to distribute the shares held in the trust fund. In addition to the other advantages that a trust offers (asset protection, preservation of wealth by avoiding fragmentation of assets, etc), a trust also avoids the application of forced heirship rules, which are all too common in Latin American countries. When they apply, these rules dictate the persons to whom, and the proportions in which, a settlor’s estate will devolve.

Part VII of the Cayman Islands Trusts Law contains what are commonly referred to as the “trusts foreign element provisions”. These provisions exclude the application of foreign law in matters relating to Cayman trusts, unless the trust deed otherwise specifies, and prevent recognition and enforcement of judgments in foreign proceedings that purport to vary Cayman trusts for the purposes of enforcing heirship rights and rights arising out of personal relationships with the settlor.

Section 90 of the Trusts Law provides that all questions arising in regard to a trust that is governed by Cayman Islands law, or questions in regard to:

(i) the capacity of any settlor;

(ii) the validity of the trust or disposition or the interpretation or effect thereof;

(iii) the administration of the trust (whether conducted in Cayman or elsewhere) including questions as to the powers, obligations, liabilities and rights of trustees and their appointment and removal; or

(iv) the existence and extent of powers, conferred or retained, including powers of variation or revocation of the trust and powers of appointment, and the validity of any exercise thereof,are to be determined according to the laws of the Cayman Islands, without reference to the laws of any other jurisdictions with which the trust may be connected. The “trusts foreign element provisions” specify that these non-recognition provisions take effect subject to any express contrary term of the trust; they also provide that they do not apply in certain specified situations, such as foreign laws prescribing generally (without reference to the existence or terms of the trust) the formalities for the disposition of property1.

Section 92 precludes the recognition of heirship rights conferred by foreign law that affect the ownership of immovable property in the Cayman Islands, or moveable property “wherever situate”.

Sections 91 and 93 of the Trusts Law provide that a foreign judgment shall not be recognised, enforced or give rise to any estoppel insofar as it purports to vary or set aside a trust validly created under the Trusts Law or deprive the trustee or any beneficiary of any rights, where the judgment arises out of heirship rights or a personal relationship to the settlor. By section 87 of the Trusts Law, a personal relationship includes a marriage or former marriage.

There are three types of foreign orders that could potentially affect a Cayman trust:

(i) Those that purport to affect the validity of the trust, or that seek to vary it;

(ii) Those that purport to affect the settlor or the trustee of the trust themselves personally – ordering them to exercise a power or behave in a certain way; and

(iii) Those that only take account of the existence, value and rights under the trust without impacting the trust itself.

In the recent case of Re B Trust2, the Grand Court of the Cayman Islands confirmed that the effect of the statutory provisions contained in sections 90 to 93 of the Trusts Law is that an order made in foreign matrimonial proceedings involving the settlor that purport to vary a Cayman trust will not be recognised or enforced in the Cayman Islands even if a trustee were to submit to the foreign court’s jurisdiction. In this case the court considered whether an order made in Hong Kong matrimonial ancillary relief proceedings to vary a Cayman trust would be recognisable or enforced in Cayman. The judge stated:

“[a]n order of the Hong Kong court purporting to effect a variation of the trust, whether in matrimonial proceedings or otherwise, cannot be recognised by the trustee. That is so even if the trustee were to attorn to the jurisdiction of the Hong Kong Court. A trust in the Cayman Islands can only be varied in accordance with the Law of the Cayman Islands and only by a court of the Cayman Islands. These overarching rules are provided for expressly in the Trusts Law (2009 Revision), in sections 90, 91 and 93…”

However, this is not to say that the decision of a foreign court will have no effect at all. The Court in Re B Trust noted that if a trustee had opportunity to exercise its discretion in a manner that would assist in the resolution of a dispute, while maintaining an even-handed approach to all beneficiaries, the trustee would no doubt give respectful consideration to the views of the foreign court, and the foreign variation order would be a material factor for the trustee to take into consideration when exercising its discretion.

If such an order were made by a foreign court, which provided that the trustee’s discretion ought to be exercised in a certain way, a trustee would generally be well-advised to seek the directions from the Grand Court as to whether to exercise its discretion to comply with such an order.

Additionally, although foreign judgments concerning heirship and matrimonial rights that purport to vary a Cayman trust will not be recognised or enforced by the Cayman court, foreign judgments against, for example, the settlor personally, directing him to exercise a power in a certain way for the benefit of a judgment creditor (where the settlor has reserved such power), may be enforced by the Cayman courts to ensure that the trust is not used as a vehicle of wrongdoing.

These statutory provisions do not apply to wills

Another option for a foreign domiciliary who owns shares in a Cayman company is for that individual to make a will dealing alone with those shares and any other property that the individual owns in the Cayman Islands. Such a will could be, but does not have to be, made complementary to a will dealing with that individual’s assets elsewhere in the world.

The position for such a Cayman will contrasts starkly with a Cayman trust, as the statutory provisions referred to above expressly do not apply to validate any testamentary trust or disposition that is invalid according to the laws of the testator’s domicile3.

So far as wills of personal estate are concerned (including shares in a Cayman company), the law of the testator’s domicile is of paramount importance. To illustrate why, let us assume you are a foreign domiciliary who has died leaving a will dealing with shares in a Cayman company.

Under Cayman Islands law, the rights (if any) held by members of your family (and the like) to proportions of your personal estate (known as essential validity) are governed by the law of your domicile at the date of your death. This is so even if the will deals only with personal property in the Cayman Islands and is governed by Cayman law. Accordingly, while generally your shares in the Cayman company will be distributed in accordance with your wishes as expressed in such a will, being movable property, that will will be subject to any overriding law of succession of your domicile at the time of your death. For instance, if you are domiciled in Brazil and continue to be domiciled in Brazil at the time of your death, the dispositions in the will would have to be valid according to Brazil’s forced heirship rules. Incidentally, a similar analysis would apply if you died intestate (without leaving a will).

The laws of the country of your domicile at death will also determine whether or not your will has been properly executed. This is known as formal validity. In England, this is regulated by the Wills Act 1963, which gives effect to the Hague Convention on the Formal Validity of Wills 1961. The policy behind the Convention is to uphold the formal validity of a will wherever possible; the Convention and the English Act treat a will as properly executed if it is executed in accordance with any of four legal systems, including the law of the country where the will is executed. The Wills Law of the Cayman Islands does not have an equivalent provision to the provision in the English Wills Act 1963 that gives effect to the Convention. Instead, based on the common law conflict of law rules dealing with succession under English common law, Cayman law defers to the domestic law of the country of last domicile or to the domestic law of any system of law referred to by the conflict rules of that law. It has not yet been decided whether the relevant domicile is at the time of the making of the will or at the time of death. Consequently, when executing a Cayman Islands will over Cayman assets, care needs to be given to which law will govern how the will should be signed, the number and capacity of the witnesses, whether it should be registered with any authority in order to be valid, and so on. This also needs to be reviewed if you change your domicile after the will has been executed.

Having said that, there is value in preparing a Cayman will to dispose of personal assets, such as shares, held in the Cayman Islands where the intention is to distribute such assets in accordance with any applicable forced heirship rules in your domicile. The benefits of such a will are these: it will be in English and subject to a separate probate application in the Cayman Islands, thereby making it more expedient to obtain a grant of probate affecting those assets than having your heirs having to start the process in your country of domicile; and, additionally, such a will will clearly set forth the list of persons with authority to represent your estate in the Cayman Islands following your death – this is essential to obtain a grant of representation in the Cayman Islands. Although it is possible to “re-seal” a foreign will, the process may give rise to difficulties, not least due to the need to translate documents into English for purposes of the Cayman probate, but also due to the fact that in certain Latin American countries, such as Brazil, the system of law may not provide any equivalent to a grant of representation.

Conclusion

Holding shares in a Cayman company will not in itself protect a foreign domiciliary holder from the effects of the laws in his home country upon death. Thought must be given to the succession which, in the Cayman Islands, is not without its pitfalls. Options include trust structures and wills, which we have touched on briefly in this article, but joint tenancy structures and life governing director share structures should be explored also. In all cases it will be important to obtain legal advice from professional advisors in your country of residence as well as in the Cayman Islands to ensure that your succession planning is appropriate to your circumstances and achieves your stated objectives.

EndNotes

1 See s.90(i) to (vi) of the Trusts Law2 November 2010, unreported, in which Ogier acted for the trustee3 Section 90(vi) of the Trusts Law

Giorgio is the co-head of Ogier’s Latin American practice. Before joining Ogier in 2002, Giorgio practiced at Sullivan & Cromwell in New York, Pinheiro Neto – Advogados in São Paulo and Linklaters in London and Paris. His areas of expertise includes corporate and commercial, structured finance, investment funds, private client and trusts, private wealth, business and trust law and listing services.