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Our Head of Private Client and Trusts, Robert Mack, takes a look at Foundation Companies in the Cayman Islands and how they differ to trusts in the private client context.

In late 2017, Foundation Companies in the Cayman Islands were unveiled to the world. The Foundation Company (“FC”) was designed to act as a corporate wealth and succession planning vehicle; in some cases, it could be a viable alternative to a trust.

There are also new and unexpected uses for FCs, such as acting as a platform for emerging cryptocurrencies and special purpose vehicles in commercial transactions.

The first thing to understand about FCs is that they are merely a variant of a Cayman Islands company and are distinct in nature from civil law foundations found in places such as Panama, Lichtenstein, and certain offshore financial centers such as Jersey. FCs also have a separate legal personality, directors, officers, plus a registered office. So what sets them apart from other Cayman Islands companies? A few key distinctions are as follows:

• FCs are not designed to distribute profits to members, but rather they are meant to carry out particular purposes in accordance with its constitution. In the trust-substitute context, a key purpose is usually to hold valuable assets in order to provide a financial benefit to a defined class of beneficiaries;
• FCs do not have to issue shares, and can, therefore, be ownerless or ‘orphan’ vehicles;
• The purposes of an FC can be entrenched, so no person or court can alter them unless the founder of the FC permits it.

It is also important to understand just how FCs differ from trusts:

• Trusts do not have a separate legal personality. The term ‘trust’ merely describes the relationship which arises when assets/property are held by one person (i.e., a trustee) for the benefit of other persons or purposes (i.e., beneficial objects);
• Trustees are the legal owners of the trust assets;
• The terms of a trust can, in certain circumstances, be changed without the consent or approval of the settlor;
• Unless a Cayman Islands trust is a private purpose or charitable trust, it has a maximum duration of 150 years; FC’s, on the other hand, are perpetual;
• The courts of the Cayman Islands have broader scope to interfere in the administration of trusts than FCs.

Perhaps the biggest ‘leap of faith’ any person wishing to set up a trust must face is the fact that once they part with their valuable assets, it is the trustee who becomes the legal owner of those assets and it is the trustee who makes all the decisions about the management of those assets going forward[1]. This loss of control, while often beneficial from a planning perspective, is often a step too far for some clients, even though it is possible for a settlor of a Cayman Islands trust to reserve to himself or others, certain key administrative powers such as a power to control distributions of capital and income[2].

On the other hand, FCs allow a client to achieve effective control over the FC assets, whether directly (i.e., by taking up a role as a director or officer of the FC), or indirectly (i.e., by appointing trusted individuals as directors or officers of the FC).

While the vast majority of settlors will appoint a professional trustee to administer their trusts[3], an FC may be staffed by the client, family members, or trusted advisors[4]. This could result in minimising administrative expenses if professional directors and officers are not involved[5]. In contrast, for example, private purpose trusts (known as STAR trusts in the Cayman Islands) require that at least one of the trustees is a regulated Cayman Islands trust corporation, and such professional trustee will look to charge market rate for their services.

Foundation Companies in the Cayman Islands offers clients a new and exciting way for clients to structure their affairs with a more familiar corporate entity, and in addition the FC enables clients to be as hand-on or hands-off on the administration of the FC as they wish to be without the risk of tainting the structure[6]. For the client wary of trusts, the FC is an excellent alternative and worthy of consideration.

Cayman Financial Review
This article can also be seen in Cayman Financial Review – Q4 2018 issue.

Footnotes

[1] Subject to the terms of the trust instrument and the law generally. It is possible in some circumstances for a client to act as the trustee of his or her own trust, however, that is often inadvisable for a whole range of reasons which are outside of the scope of this article.

[2] Often times it is impractical or inadvisable for a Settlor to reserve such powers as it may have an adverse tax consequence in his or her place of tax residence.

[3] Due to the complexity of trust administration, tax efficiency, and Cayman Islands legislation which prescribe that professional trustees must appointed for certain types of trusts (ie. STAR trusts).

[4] The only requirement is that the Secretary of an FC must be a ‘qualified person’ being a person who is licensed to provide company management services in the Cayman Islands.

[5] An annual government maintenance fee of approximately US$853 is payable for each year the FC is registered however. Trusts to not attract any such annual fees.

[6] If too many trustee powers are usurped, or if the trustee/settlor relationship becomes corrupted there is a risk the trust may be deemed to be a ‘sham trust’.