Oct 2023
Many high-net-worth individuals and families use a private trust company (PTC) when looking to structure their family wealth. Given that settlors of trusts are sometimes reluctant to relinquish control over the assets transferred into a trust, a PTC may be a suitable option for settlors and family members to retain a certain degree of control and involvement without prejudicing the legal validity of the overall trust structure. The board of directors of the PTC can include family members and their trusted advisors, as well as any local professionals.
Benefits of using a Cayman PTC
There are many benefits to using a Cayman PTC. Not only do they allow for the direct involvement of family members in the decision-making process, they also:
- allow for familiarity and continuity within the structure as family members will be more familiar with the assets of the trust as well as more likely to stay on the board of the PTC for a longer duration – using an institutional trustee with ongoing staff movement or turnover is likely to cause disruption within the structure;
- provide flexibility as the Articles of Association of the company can be tailored to suit the settlor’s intentions and the scope of its role and powers as trustee can be fine-tuned accordingly;
- provide a structured forum for overall family education and governance which can enhance the education of the beneficiaries so they understand how the family’s assets are managed and, where appropriate, can contribute to the decision making of the trustee; and
- provide a more cost-effective structure as the annual service and regulatory fees associated with a licenced trust company are often significantly higher than that of a PTC.
Private Trust Companies in Cayman
A PTC may be either a company limited by shares or by guarantee whose sole purpose is to act as a trustee for a specific trust or a related group of trusts.
The regulation of PTCs in Cayman is governed by the Banks and Trust Companies Act (BTCA) and the Private Trust Companies Regulations (PTCR). The general rule under the BTCA is that no person may carry on the business of acting as trustee from within Cayman without possessing a trust licence issued by the Cayman Islands Monetary Authority (CIMA). Under the PTCR, a private trust company may obtain an exemption from this licensing requirement provided it meets certain specified criteria. For it to meet the criteria to obtain the exemption, the PTC must:
- be a company incorporated in the Cayman Islands;
- maintain its registered office in the Cayman Islands with a service provider that holds a trust licence issued by CIMA under the BTCA;
- include the words “Private Trust Company” or the letters “PTC” in its registered company name; and
- only conduct “connected trust business”.
Connected trust business is defined in the PTCR as “trust business in respect of trusts of which there is one or more than one contributor to the funds of which are all, in relation to each other, connected persons”. A PTC as trustee of a family trust will satisfy the “connected trust business” requirement under the PTCR as all contributions of property to the trust are usually connected to the other by way of family relationships. We note that “connected persons” covers both individuals and companies.
Directors of a PTC
It is important that some thought goes into who is appointed on the board of directors of the PTC. There must be at least two individual directors of a PTC. However there is no requirement that any of the directors be ordinarily resident in Cayman. Whilst the board of the PTC may be made up entirely of family members, it is often advisable that at least one of the directors has knowledge and experience in trust administration.
Ownership of the PTC
The simplest structure for the ownership of a PTC’s shares is that the settlor or members of the settlor’s family hold the shares personally. However, this may not be desirable as it may give rise to tax or probate issues noting that the shares fall within the individual shareholder’s estate. Therefore, it is common for a STAR Trust (a Cayman Islands non-charitable purpose trust) to hold the PTC shares. The STAR Trust is established for purposes only (i.e. no named/individual beneficiaries) broadly being to hold the shares and facilitate the management of the PTC. This means that the “parent” of the PTC is a licensed trust company which holds the shares of the PTC in its capacity as trustee for the corresponding purpose trust. The trustee’s role is relatively passive such that the management and administration of the PTC is left to its board of directors.
One disadvantage of using this type of structure is the additional costs of appointing a Cayman licenced trust company as trustee of the purpose trust, and the extra layer of structure/administration which is not necessary when using a Cayman Foundation Company as a PTC as outlined below.
Cayman Foundation Company as PTC
A Foundation Company, established pursuant to the Foundation Companies Act, is incorporated in the same way as a regular company and may operate as a Registered PTC. This allows for a more simplified structure without the need for a purpose trust holding the PTC’s shares, noting that Foundation Companies may cease to have members/shareholders.
A Foundation Company has many of the same features as an ordinary company, including legal personality (making it a familiar structure). However, unlike a typical company, it can have beneficiaries or purposes (as with a trust). Further, a key feature which distinguishes it from an ordinary company is that it can cease to have members and ownership. This is an attractive feature for PTCs which are not necessarily designed with ‘ownership’ and profit at the forefront. A further advantage is the flexibility this structure offers, meaning there is wide scope to tailor governing documents to the needs and objectives of the family.
Ordinarily, a Cayman Foundation will have the following key roles:
- Founder(s): similar to the settlor of a trust, this will generally be the legal person responsible for establishing the structure. As the Foundation Companies Act does not formally define the role of a “Founder”, the governing documents may specify what (if any) powers the Founder will retain. For example, the Founder may reserve the power to appoint the directors, amend its governing documents or alternatively the Founder may have no ongoing role in relation to the Foundation Company whatsoever.
- Director(s): as with an ordinary company, a Foundation Company is managed by its board of directors. By default, the role and powers of the directors will be the same as for an ordinary Cayman company. However, there is scope to restrict the Directors’ exercise of their powers so that the Foundation Company’s decision-making process is more aligned with specific governance objectives. For example, to vest power for certain decisions in committees or include the requirement for consultation with family members.
- Supervisor(s): Where a Cayman Foundation ceases to have members/shareholders, it must have one or more “Supervisors” (who may but need not be directors). As suggested by the title, such officeholder essentially fills the gap left by the lack of shareholders in that they can enforce the rules of the Foundation Company as against the directors and would typically have the right to access the files, books and accounts of the company. The Supervisors may therefore play a role in ensuring the Directors comply with the organisation’s governance model.
A Foundation Company may have “bylaws” which do not form part of the company’s constitution and therefore do not need to be filed with the Registrar of Companies and will remain private. This affords Foundation Companies with a degree of privacy in its operations, coupled with further flexibility to set its own rules in relation to governance, structure and management.
Bylaws may relate to any aspect of the business or affairs of the Foundation Company, or any of the duties or powers of the directors and other officeholders, including the manner in which to achieve the Foundation Company’s objects. Bylaws may also set out rules with respect to one or more committees which are capable of instructing the directors in the exercise of their powers. For example, the PTC may have an investment committee which approves any investment strategy/policy of the Trust.
Ongoing administration
A registered PTC is required to:
- maintain its registered office at the office of a company which holds an unrestricted trust licence under the BTCA (such as Conyers);
- allow CIMA to, at all reasonable times, inspect all documents and records of the PTC held or that should be held at the registered office; and
- make available for inspection by CIMA and at that registered office adequate, accurate and up-to-date copies of the terms of the trust, the name and address of the trustee, the name and address of the settlor, the name and address of any protector/enforcer (if any), the name and address of any contributor to the trust, the name and address of any beneficiary to whom a distribution is made from the trust; any deed or other document varying the terms of the trust; and all financial and transactional records of the private trust company and its connected trust business.
In effect, good record keeping and management at the trust level by the PTC’s board of directors working with its registered office service provider should ensure that such records are maintained as above. A well-drafted and properly governed PTC, together with Cayman’s robust legal and regulatory framework, can provide a useful trustee option and a structured forum for settlors and their families to effectively deal with the administration of trust structures.