The Perpetuities (Amendment) Bill, 2024 (Bill) has been passed by the Cayman Islands Parliament and will come into force following royal assent on a date to be appointed by Order of Cabinet and will be known as The Perpetuities Act (2024 Revision) (Act).
The Bill was published on 24 May, 2024 and is aimed at enhancing the trust and estate planning sector in the Cayman Islands. The consultation process of the Bill included the membership of STEP Cayman Islands, other local industry representatives, including Appleby, to assist with crafting the best version of the legislation since its 1999 predecessor was enacted1.
The position in the Cayman Islands before the Act was passed regarding perpetuity periods applicable to trusts was:
(a) Trusts that were established on or after 1 August 1995 were subject to a statutory perpetuity maximum period of 150 years2 alongside the "wait and see" rule. The "wait and see" rule safeguarded against trusts failing by allowing interested persons to wait until the expiry of the perpetuity period to see if a disposition of property has vested or not; and
(b) Cayman Islands STAR Trusts are not subject to the rules against perpetuities and therefore can exist in perpetuity3.
Major Highlights of the Bill & Choice Given to the Settlor
The Act permits the settlor of a new trust to disapply the rule against perpetuities and to create a perpetual trust. The removal of the mandatory 150-year perpetuity period rule for existing and future trusts4 (Rule) immediately brings Cayman's legislation in line with competing trust jurisdictions such as the Bahamas, Hong Kong, Jersey and Guernsey. The disapplication of the Rule preserves the Cayman Islands top tier position as the global jurisdiction of choice for trusts and trust services.
One of the most notable points involved in the disapplication of the Rule is that a settlor now has the option to choose whether to disapply the Rule against perpetuities for a newly settled trust or not. This allows the settlor to decide on the course of action and the trajectory of the trust and is a completely optional choice. If the settlor does not disapply the Rule, the Rule will continue to apply to the newly settled trust which will have a maximum period of 150 years as before.
If a new trust is created and the settlor exercises their option to forego the Rule, the new trust must meet the following criterion:
The trust must not hold or have any interest in land in the Cayman Islands (i.e. Cayman real estate holdings cannot be an asset of a trust that disapplies the Rule).
This real estate holdings caveat to the Rule is a matter of policy which the Cayman Islands Government wished to retain in order to protect the Cayman Islands from any adverse impact that the disapplication of the Rule may have on land holdings held in trust within the Islands. However, it is clear that the vast amount of assets held in Cayman settled trusts are foreign assets and not Cayman land holdings. This further provides comfort to the residents of the Islands as Cayman land holdings are not being significantly impacted.
Impact on Existing Trust Structures & How the Rule Applies
Under the newly proposed S.20 of the Act, an application to the Grand Court to disapply the Rule to an existing trust may be made by a trustee, settlor, enforcer or a person with a beneficial interest in the trust. The caveat that would block an existing trust making an application to disapply the Rule is that the existing trust cannot hold or have an interest in land within the Cayman Islands. This brings the legislation in line with new trusts disapplying the Rule as explained above. Under S.20(2), the Grand Court has been given the power to vary the terms of the trust and grant an order in relation to the application to disapply the Rule where the Grand Court is satisfied that it is in the best interests of the beneficiaries or purposes of the trust making the application.
In practice, before the Cayman regime underwent the transition to the proposed Bill, it was important for trust deeds to specify the perpetuity period applicable to a trust (i.e. when the trust would terminate and trust assets would vest). On the 'vesting date' the trust assets are distributed to a beneficiary and the powers of the trustee are eliminated as the trust period has come to an end. Where the particular vesting date is fixed for existing trust structures, issues may arise in relation to oncoming taxable events in relation to the vesting date, any charitable structures may also face issues, and family estate planning goals may be interrupted due to the vesting date. The ability to apply to the Court under S.20 to disapply the Rule may greatly assist with any of the foregoing issues, as well as provide peace of mind to keep assets retained within the trust structure indefinitely.
Impact on Change of Governing Law of Trust Structures & How the Rule Applies
The new Bill further allows for established foreign trusts to which the Rule currently does not apply and where the governing law is altered to that of the Cayman Islands to disapply the Rule through an application to the Grand Court. S.89 of the Cayman Islands Trusts Act (2021 Revision) outlines the provisions that relate to governing law and the procedure and validity of selecting the laws of the Cayman Islands to govern the trust5.
Under S.21 of the Act, if the governing law of the foreign trust meets the following criterion a disposition may be made in accordance with S.89 of the Trusts Act (2021 Revision)6 upon the application that the Rule shall not apply to the trust:
(a) That the governing law of the trust is currently of
unlimited duration; and
(b) The rule against perpetuities does not currently apply to the
trust under its governing law.
Further in line with the overarching theme of protecting land holdings within the Cayman Islands, any land or an interest in land within the Islands will not be subject to the Rule being disapplied by an application brought under S.21.
Appleby Commentary
- In terms of jurisdictional comparison, there certainly is a trend to disapply the rule against perpetuities in a multitude of jurisdictions globally. These include, but are not limited to the U.K. and the BVI extending the perpetuity periods, while jurisdictions such as Ireland and Hong Kong have abolished them altogether. The United States remains state dependent, however New Jersey and Pennsylvania have abolished the Rule.
- The enhancements to the Act work in tandem with the Trusts Act (2021 Revision)7 and continue to strengthen the Cayman Islands dynamic and flexible trust legislation as a whole. Additionally, the clear drafting of the new provisions of the Act provide for a practical approach for trust professionals to engage with the legislation.
- In practice, Appleby advises a wide variety of clients on trust structuring matters involving the Perpetuities Act, in conjunction with the Trusts Act (2021 Revision)8. We are looking forward to the new flexibility that the Act will offer our clients when settling new trusts, potentially altering existing trust structures and when transferring structures to sit under Cayman Islands law in order to take advantage of the ability to extend trust structures into perpetuity.
Footnotes
1 Perpetuities Act (1999 Revision)
2 Perpetuities Act (1999 Revision), S.5(1)
3 Part VIII Trusts Act (2021 Revision)
4 Ibid 2
5 Trusts Act (2021 Revision), S.89
6 Ibid 5
7 Trusts Act (2021 Revision)
8 Ibid 7
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.