Cayman Islands trusts for U.S. citizens

Trust legislation and its organization

The Trusts Act provides statutory rules for trust administration, trustee appointments and particular trust arrangements. Its provisions address replacement trustees, powers that a settlor can retain, registration of exempted trusts and a separate regime for special trusts.^[1]

The Act's definitions extend trusts and trustees to implied and constructive trusts and to certain personal representative duties. Its definition of property covers real and personal property, interests in property and debts, so the statutory vocabulary extends beyond land or money alone.^[1]

The trust instrument remains relevant alongside the statutory provisions. Section 110 states that statutory trustee powers supplement powers in the instrument and generally operate subject to its terms, unless the Act states otherwise.^[1]

Trust arrangements and the roles within them

The Act distinguishes ordinary trusts and powers from special trusts and powers. The STAR Laws apply only where the trust instrument expressly states that they apply.^[1]

A special trust can have people, purposes or both as its objects. Its purposes can be charitable or non-charitable, provided they are lawful and consistent with public policy.^[1]

The special trust provisions distinguish beneficiaries from designated enforcers, although a person can occupy both roles. An enforcer is generally treated as having a fiduciary duty directed toward proper execution of the trust, subject to evidence of a different intention.^[1]

A special trust generally requires a trust corporation among its trustees, subject to statutory permissions or judicial authorization. Records kept at its Cayman Islands office include the trust terms and the identities of trustees and enforcers. They also include settlor identities, property records and distributions.^[1]

Reserved powers can include changing or revoking the instrument, directing property transactions and appointing or removing trustees or beneficiaries. Section 14 provides that reserving or granting its listed powers does not itself invalidate the trust.^[1]

An exempted trust may be registered if the Registrar considers that its beneficiaries do not and are not likely to include a person resident or domiciled in the Islands, subject to an exception for objects of charitable trusts or powers. A beneficiary subsequently becoming resident or domiciled in the Islands does not itself terminate that registration, although the tax provision contains a separate qualification for that beneficiary.^[1]

Regulation and licensing categories

The Cayman Islands Monetary Authority regulates trust business through licensing and registration, as well as continuing supervision. Trust business means acting commercially as a trustee, executor or administrator.^[2]

• A Trust Licence authorizes trust business within the statutory definition.^[2]
• A restricted Trust Licence limits the business to people identified in the undertaking accompanying the application.^[2]
• A Nominee (Trust) Licence permits a wholly owned subsidiary to act solely as nominee for its trust licensee parent.^[2]
• Controlled subsidiary registration permits specified trust services connected with the licensed parent's trust business without a separate licence.^[2]
• Private trust company registration authorizes services for connected persons as defined in the applicable regulations.^[2]

The Fiduciary Services Division processes relevant licence applications and registrations. Its supervision includes analysis of audited financial statements and management meetings.^[2]

Tax provisions and statutory obligations

Section 81 establishes an application-based tax undertaking for an exempted trust. The Financial Secretary may give an undertaking concerning specified Cayman taxes enacted after the undertaking, covering the trust property or income and the relevant trustees or beneficiaries.^[1]

The undertaking can run for up to 50 years measured from the trust's creation. That period describes the undertaking's duration, without establishing a general duration for the trust itself.^[1]

A beneficiary remains subject to applicable tax and duty while resident or domiciled in the Islands despite the undertaking. Exempted trust trustees also have an annual statutory fee obligation. When required by the Registrar, they provide accounts and minutes, along with other information.^[1]

Reporting and information exchange

The Cayman Islands participates in the Common Reporting Standard, which is administered locally by the Department for International Tax Cooperation.^[4]

The Cayman Islands FATCA agreement with the United States is in force. Treasury describes FATCA as requiring foreign financial institutions to report information about financial accounts held by U.S. taxpayers or foreign entities with substantial U.S. taxpayer ownership.^[8]

Special trusts also have their own statutory identity-record obligations. Section 105 requires records identifying trustees and enforcers, as well as settlors. It also requires records of property settled on the trust and its distributions.^[1]

U.S. tax and information reporting

A U.S. citizen falls within the IRS definition of a U.S. person. The IRS describes foreign trust connections as potentially involving income tax consequences and several distinct information returns.^[10]

The Form 3520 instructions define foreign status through the domestic trust tests. Domestic classification requires both U.S. judicial supervision of administration and U.S. person control over all substantial decisions; a trust outside that definition is foreign.^[11]

Form 3520 generally applies to specified transfers, distributions, loans and U.S. ownership of foreign trusts. The IRS also includes uncompensated use of foreign trust property among its reporting triggers.^[10]

A U.S. owner is responsible for ensuring that the foreign trust files Form 3520-A and supplies the required annual statements. If the trust does not file, the IRS describes a substitute Form 3520-A attached to the owner's timely Form 3520.^[10]

Form 8938 can apply when specified foreign financial assets exceed the relevant reporting thresholds. FBAR can separately apply to a financial interest in, or signature authority over, a foreign financial account.^[10]

The IRS describes conditional exceptions from Forms 3520 and 3520-A for certain foreign benefit trusts. Those exceptions do not remove any otherwise applicable Form 8938 or FBAR obligations.^[10]

Reporting accompanies substantive tax rules. A U.S. person treated as a foreign trust's owner generally reports its income, while a U.S. beneficiary receiving a foreign nongrantor trust distribution generally reports the beneficiary's share of distributable net income.^[10]

Immigration residence certificates

The Immigration (Transition) Act describes residence certificates for persons of independent means and direct investors. These provisions address permission to reside and work, while the IRS separately includes U.S. citizenship within its U.S. person definition.^[7][10]

The independent means residency certificate lasts 25 years and carries no right to work. Renewal is subject to the Director of WORC's discretion and statutory conditions. The permanent residence route refers to a prescribed investment in developed real estate and prescribed financial resources.^[7]

A direct investment certificate can permit residence and work in the invested business in approved occupations. The Act describes a 25-year certificate, discretionary renewal and requirements to submit audited financial statements and employment information.^[7]

More on Cayman Islands

Cayman Islands court and legal system

The Cayman Islands courts administer justice under the Constitution, local laws and common law principles developed by local, British and other Commonwealth courts. Court procedure is largely governed by court rules. The courts also publish directions on fees and taxation of costs, a court calendar, and cause lists that record scheduled matters and court events.^[6]

The Summary Court is the first level in the court hierarchy. Magistrates hear proceedings concerning offenses, and the court also hears civil disputes with subject matter up to CI$20,000. The Grand Court has unlimited jurisdiction and hears other types of civil disputes. It may hear proceedings concerning offenses before a judge or, at the defendant's election, before a judge and jury.^[6]

The Court of Appeal follows the Grand Court. The Judicial Committee of the Privy Council is the highest court in the appeal hierarchy. Appeals lie to the court above at each stage, from the Summary Court through the Grand Court and Court of Appeal.^[5][6]

The principal Cayman Islands court laws are the Grand Court Act and Grand Court Rules, the Court of Appeal Act and its rules, and the Summary Jurisdiction Act and Summary Court Rules. Together they govern the Court of Appeal, the Grand Court and the Summary Jurisdiction Courts.^[5]

Questions and answers

Related resources

Related glossary terms

• Trust variation: Trust variation means a change to a trust's terms or powers. Jersey, Cayman Islands and Bermuda laws and the Hague Convention address related terms and rules.
• Purpose trust: A purpose trust holds property for purposes, not for beneficiaries, and relies on an enforcer. Bermuda and Jersey define it differently, as does Cayman.
• Enforcer: An enforcer is a person given a role in relation to certain trusts. Jersey and Cayman law describe how enforcers are appointed, with their duties and rights.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.