21 February 2022

Cayman Islands trustees: Caught in the crossfire

The role of trustee of a trust is not one to be accepted on a whim: in a modern and highly regulated world, which now includes families who may have generated their wealth in novel ways and individuals with a greater propensity for litigation, the position can bring with it exposure to great risk and liability.

For trustees of Cayman Islands (Cayman) trusts, administering the trust can become even more complex if they face conflicting and hostile requests or demands from settlors or beneficiaries of the trust who are located in different jurisdictions and have competing interests, even if there is no allegation of breach by the trustee itself. Stuck between the proverbial rock and hard place, it can be very difficult for the trustee to determine which way to turn, particularly if the risk of cross-border disputation is high. However, with careful management of these situations and knowledge of external options for resolution including before the Cayman courts, trustees will be able to find a clear path forward.

Requests for information

One of the first indications that a trust dispute may be brewing, or that the trustee’s past conduct may be under review, is the trustee's receipt of a request for information issued by a beneficiary or other interested parties (such as a protector of the trust). If these parties are connected with a traditional discretionary family trust, then they will likely have varying rights to basic trust information such as a copy of the trust deed and trust accounts. However, parties seeking information about a Cayman STAR trust will have far fewer rights: information about, and rights to enforce, STAR trusts sit solely with the person appointed to the role of enforcer, meaning that beneficiaries are not entitled to receive any information at all. On receipt of requests such as this, the trustees should in the first instance undertake a careful review of the trust deed and ascertain the rights of the person making the request. Consideration should then be given to the wider family context, the way in which the information may be used by the requesting party, and how other interested parties might react to a disclosure of trust information before any response is issued or information passed on.

Death of a matriarch or patriarch

One of the more common backgrounds to requests for trust information, and a likely harbinger of impending litigation, is the passing of a settlor who leaves behind a valuable estate (and, more often than not, family members from multiple marriages). The situation becomes particularly dire where the late settlor has not left a will, or if the will that is available is contested. In these circumstances the executors of the estate may find themselves in the middle of a very hostile battle for the estate assets – one threaded with high emotions and unhealed family wounds. To complicate matters further, the late settlor may have established trusts to hold very significant assets outside of his or her personal estate with entirely different beneficiaries. Unhappy family members who learn of these trusts may seek to challenge the validity of the trusts in an effort to draw the trust assets back into the estate (and out to them as beneficiaries of the estate). Executors and trustees of estates should prioritize the settlor's written wishes if available, but the safest course in these circumstances will be to consult with a legal advisor as early as possible so that they can have clear guidance on the complicated rules surrounding probate and succession law and avoid unnecessarily inflaming family disputes.

Marital breakdowns

Matters can become particularly complex for trustees when they are drawn into marriage breakdowns, a state of affairs that has sadly become increasingly common as couples deal with the fallout of the global pandemic. Trustees may face requests for information about whether trusts contain marital assets, queries about how the trustee intends to administer the trust in the best interests of the family in light of a separation, and demands to partition the assets in light of a pending divorce. All of these interactions with settlors and beneficiaries need to be carefully managed to ensure independence, neutrality, and adherence to relevant laws. Of course, when divorces become particularly hostile, the situation can deteriorate very quickly and the trustee can be drawn into all manner of contentious, and cross-border, applications as the battle begins over (and accusations are made about) ownership of trust assets. In these situations, a trustee must take care to avoid taking steps (such as submitting to the jurisdiction of a foreign court, or making premature disclosures of information) that could inadvertently breach confidentiality obligations and expose the trust and its assets to challenges. Again, obtaining legal advice in early course is always a prudent step.

Paralysis

Where trustees are unable to respond to or resolve requests and competing claims made by the settlor or beneficiaries to their satisfaction, the trustee may well find itself in a situation where any move it makes exposes the trustee to potential liability and the threat of legal action. Decision-making in such circumstances is not only very difficult and highly stressful but in rare circumstances become virtually impossible in that the trustee finds its interests in limiting its own liability conflicting with its duties to the trust . In this scenario, a trustee will likely find itself effectively deadlocked. For trustees of Cayman trusts who are unable to find any sensible alternatives to the competing claims, the best and possibly only option in this scenario will be to make an application to surrender its discretion to the Grand Court of the Cayman Islands (the Court). Assuming it is satisfied that there is good reason to do so, the Court will step into the shoes of the trustee and determine how to exercise the trustee's discretion in order to find an appropriate path forward for all parties.[1] This may include directions as to next steps, and the sanction of conduct by the trustee having regard to all the material circumstances.

The importance of liquidity

Clever, and complex, structuring not only offers a robust asset protection plan for individuals and families but it also ensures that the challenges of the kind detailed above are mitigated. However, that same complexity can also lead to headaches when disputes arise if liquid trust funds have been soundly ringfenced in underlying entities and cannot be easily accessed in order to fund the costs of obtaining, for example, legal or tax advice in response to challenges to the trust. Even trustees holding significant liquid trust funds may have access to those funds severely restricted by terms of the trust deed that might prevent use of those funds without the consent of a protector or enforcer (who may be the party seeking to take issue in respect of the trustee’s conduct). Being alive to these issues at the time the structure is devised, or the trust deed is drafted, and including mechanisms to ensure that the trustee has access to liquidity as needed, can go a long way to prevent compounding expenses as the trustee seeks to relieve restrictions on access to trust funds. It may also prevent a situation where the trustee must pay for advice needed urgently from its own pockets. 

A way forward

Despite the minefield of potential issues outlined above, with careful and considered planning at the outset, a willingness to take prompt legal advice in complicated or contentious scenarios that arise, and the option of seeking directions from or the sanction of the Court if appropriate, trustees of Cayman trusts (and executors of Cayman estates) can more confidently manage disputes and calm tensions for the benefit of all involved.   

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[1] As was the case in the matter of HSBC International Trustee Limited v Tan Poh Lee and Ors – FSD 175 of 2019 (IKJ).

 

An original version of this article was first published by STEP Journal, February 2022.

© Carey Olsen 2022.

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