08 June 2022
Family office fundamentals – the Cayman Islands experience
The upheaval faced by the global community over the past two years has prompted changes in almost all areas of our lives. Perhaps one of the most fundamental consequences for international family offices has been the need to re-prioritise and refocus – for many, the immediate needs of families and the ultimate goals of the family office itself are very different than they were prior to the COVID-19 pandemic.
Having been asked to manage restrictions on mobility, changes in investment portfolios, and risk appetite and to consider more closely matters of mortality and succession, many family offices have found themselves in uncharted territory. As a result, family office representatives are now taking a greater interest in training and upskilling the next generation, expansion of investment mandates and philanthropic interests, and planning for the future global mobility of family members including to new jurisdictions. On all of these fronts, the Cayman Islands, long known as a leading international financial centre, has proven itself to be a destination of choice for family offices.
A Change In Approach To The Management And Preservation Of Wealth
In calm times, the majority of sophisticated family offices will have diversified portfolios, with investments spread across platforms and vehicles through a range of private and public strategies. Prioritising wealth preservation via traditional models can be a reliable strategy in these circumstances. But in more tumultuous times, remaining locked in a conservative strategy may do more harm than good. More flexible family offices have succeeded in identifying opportunities triggered by the pandemic, and those willing to take risks and to invest in what might previously have been seen as speculative assets have reaped the spoils. A particularly interesting development in Cayman has been the increased use of family office “clubs” where family offices have become more willing to share their internal strategies and business dealings with others, resulting in more opportunities to share market intelligence and to co-invest. Flexible Cayman vehicles, such as limited liability partnerships and foundation companies have easily facilitated this more cooperative approach.
The Human Side
Of course, a change in approach – particularly in a multi-generational family office – requires a bold first step away from what might be a well-established family policy on investing, and this is usually taken by a new generation. Many children of wealthy families grow up in the shadow of their parents and grandparents, something they are increasingly looking to step out of when the time is right. That might be in the form of forging their own career path outside of the family business empire or it could be by the creation of a new spin-off structure which they can manage and control to support their own causes (charitable or otherwise). If they choose the latter route, a new structure in the Cayman Islands seeded (directly or indirectly) from their family's wealth can be a very good option. There is a wide range of vehicles to choose from, such as ordinary discretionary trusts, STAR trusts, foundation companies and standard exempted companies, with different assets and objectives being suited to some but not others. Establishing a new Cayman structure early can provide enhanced asset protection benefits (specifically in the domain of relationship property issues which might arise) and, depending on the relevant tax regimes to which they may be subject, tax efficiencies which can grow and compound over time. These benefits will endure not only to the next generation themselves but also to their own families and descendants over the course of time.
With a willing next generation taking on leadership roles within the family, family offices can also expect to address organisational challenges that might rear their head as part of the process of establishing new structures or branches. Outdated systems or lack of clear roles and responsibilities may need to be addressed with greater urgency and the agreed family vision, purpose and strategy may all need a fresh approach. Increasingly, family offices are using flexible Cayman Islands structures liked those identified above that enable them to establish advisory boards to support successive generations of the family in their delegation and decision making, allowing younger family members to be introduced not only to the family business but to the responsibilities that come with wealth.
Philanthropy In A Changing World
Part of a fresh approach might also involve reconsidering what philanthropic ventures are pursued by the family office with reference to a changing world. Increasingly, family offices are moving away from traditional charitable initiatives, for example, the establishment of foundations in the family name or commitments to large endowments (although these certainly do still exist). Those wanting to support charitable giving are taking care to ensure that the funds they donate are being used to support the relevant cause without being spent on administrative fees of the charity. This is likely a by-product of the fact that some charities are said to spend up to 70 per cent of the funds they receive as donations on the costs of running the charity itself, leaving only 30 per cent to support the charity's purpose. How charities spend the funds they receive is often relatively opaque which only exacerbates the issues for some donors.
In light of these problems with traditional charities, cryptocurrencies, with their immutable public ledgers, are seem by some as the solution. Given the relative ease of tracking the movement of Bitcoin, the most widely known cryptocurrency, charities that are prepared to accept and deploy crypto in support of philanthropic causes seem to be in vogue. This is perhaps also a result of many in this space having seen significant gains which can lead to large tax bills. In some jurisdictions, making charitable donations can reduce a person's liability to tax and so it is unsurprising that they might opt to support a charitable cause over the alternative.
The Cayman Islands is certainly seeing an uptick in the interest for the establishment of charitable organisations to accept and pay out cryptocurrencies. That is supported by a flexible charities regime known as the Non-Profit Organisations Act (the NPO Act), which allows donations to be received in cash and any other property, and the recently introduced Virtual Asset (Service Providers) Act (the VASP Act), which gives regulatory clarity to crypto-related activities. A key aspect to that regulatory clarity is that virtual assets services (aside from virtual asset issuances) need to be offered as a business and on behalf of another person. As such, it will be fairly clear for most charities wanting to accept and deploy cryptocurrencies that they will not be subject to any regulation outside of the NPO Act. This trend is likely to only strengthen over time.
Next Generation Mobility
Having looked at the family office as a whole, at investment strategies and at philanthropic endeavours, it is very common for family members to consider their own specific circumstances more closely. Over the past few years, great emphasis has been placed on global mobility with the next generation (even those without families of their own) looking more closely at where they might settle in the long term.
On this front, the Cayman Islands has seen an influx of applications for residency by investment. It is not surprising; the jurisdiction offers a lot to a high-net-worth family looking for an alternative base and offers much more to families than its status as a financial powerhouse might suggest. A British Overseas Territory, the Cayman Islands is a tax neutral jurisdiction with automatic financial reporting to most countries in the world via CRS and FATCA. There are no direct taxes: residents, who are made up of Caymanians as well as individuals of more than 100 different nationalities, are not subject to income tax and there is no company or corporation tax, inheritance tax, capital gains or gift tax. The primary sources of the government’s revenues are derived from stamp duty taxes on property transactions, imports, work permits and tourism. Cayman has the lowest crime rates in the Caribbean and offers excellent healthcare and education options, providing a safe place for families to live, settle and thrive.
There are a number of Cayman-specific residence options that may appeal to those in the Next Gen category looking to establish their own structure. There is a variety of residency by investment programmes meaning that it is possible to experience the benefits of living in the Cayman Islands whilst at the same time saving on the costs of certain local services which might be required. For those that operate qualifying businesses such as tech and aviation, there is an additional option of setting up a presence in the Cayman Islands Special Economic Zone (SEZ). This can be an expedient way to obtain residence in the Cayman Islands, with permits being granted in four to six weeks along with dedicated office space and a ready-made network of like-minded individuals and companies.
For others seeking a simpler route, evidence of independent means, being sources of income outside of Cayman above a certain level or an investment in Cayman, commonly in real estate or business, will be enough. Establishing a Cayman Islands branch of the family office is also possible: options for structuring will depend on their specific requirements, but the jurisdiction offers an impressive number of skilled and highly-experienced service providers to assist family offices as needed.
Heading Into The Future
With changing investment mandates, eager members of the next generation, increased use of offshore structures, and support for the global spread of family members, the modern family office will undoubtedly look much different to the traditional model of years gone by. But, with the innovative and flexible structures offered by offshore jurisdictions such as the Cayman Islands, and the option of being warmly welcomed into a stable and well-developed jurisdiction by accessible residency programmes such as those described above, the options for family offices on the path to evolution are both plentiful and robust.
An original version of this article was first published by IFC Review, May 2022.