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Blending Trusts and Private Funds

The legal, fiduciary and administrative service providers in the Cayman Islands are constantly reviewing and improving the solutions available to international investors, whether institutional or private. Flexible and tax neutral financial products enable clients to structure international investments in an effective, compliant and legally sound manner.

Such constant focus over decades combined with changing external factors has lead to the identification of solutions that may not have been envisaged at the time their structural components were first created.

As well as being a leading trust jurisdiction, Cayman is the world’s leading domicile for offshore funds, having the dominant market share. This hard won and cherished status has led to a substantial increase in business from compliant clients wishing to combine Cayman’s strength in both fund and private wealth sectors. Legal framework innovation began many years ago, but the opportunity to combine these strengths is now.

Private funds are not offered to the general public, they are typically established for the benefit of a closed group of investors for a specific and shared purpose, including joint ventures for foreign direct investment or related HNW individuals and/or their Family Office.

Cayman is a key jurisdiction for structuring country to country investment via private funds because of its international compliance, legal and operational standards, its relationship to the UK and because it doesn’t add an additional layer of taxation. These factors are key considerations for international private capital in all of its forms.

For country to country investment, the private fund is usually operated by a management company with representatives of both countries. While a STAR trust may be part of the overall structure to add a level of independent governance (often holding the fund and/or the management shares of one of the parties), it is in context of private funds for a Family Office or for individual, international HNWIs that the advantages of combining private funds with trusts are most apparent.

A number of factors drive the use of private funds as part of an investment and asset management structure. A wealthy family often has several members who are citizens or residents of more than one country. A well-designed trust enables the founder or controller of the family’s wealth to control the terms on which the family’s assets (in the trust) are grown tax-free and can be distributed as income or transferred as gifts for people (or for purposes) wherever they are, in the most risk, cost and tax efficient manner. The formation of a private investment company (PIC) owned by the trust has been the principal structure in recent times. However, newly established and unprecedented transparency, reporting and cooperation amongst the tax authorities of different countries has caused a re-evaluation of established thinking. The OECD’s Common Reporting Standard and the USA’s FATCA reporting requirements have led to the legitimisation of enormous wealth that was previously in the dark and often not very productive for anyone. The series of amnesties granted by nations to their citizens to either report and pay tax on undeclared assets held offshore or face draconian fines and criminal liability has enabled the owners of such post-amnesty wealth to employ it productively, as reinvestment into their home country and to use it internationally to diversify their portfolios. This is where private funds come into the picture. Funds are much more flexible in their structure than PICs and include meaningful substance, governance and often regulation; making them the best vehicle through which to manage diverse investments.

International families are inherently complex, family members have unique requirements, interests and needs and (often) nationalities; these differences combine with the characteristics of the family trust assets by situs and form and require carefully structured solutions. Creating a fund with professional, third-party service providers can add new possibilities related to both the form of ownership interests issued by the private fund and to whom they are issued; these choices can be made to suit the beneficiaries according to their particular circumstances. We regularly see sophisticated fund structures, such as segregated portfolio companies (SPCs), used as private funds for HNW families. Using SPCs allows for defined participation in the underlying assets which can be legally segregated from one another where appropriate based on strategy or the character of the assets themselves. For example, there might be different beneficiary participations established by the trust in the holdings of one segregated portfolio (each a sub-fund of the SPC) rather than another. With existing and planned controlled foreign corporation rules in many countries, using a fund as the trust’s investing structure is increasingly the right choice.

For further information please contact:

Peter Cockhill
CEO & Group Legal Director
E.: pdc@jpintegra.com | T.: +1 345 943 2252
Address: Governor’s Square, 23 Lime Tree Bay Avenue, Grand Cayman, Cayman Islands.
Dominic Lawton-Smith
Group Director – Head of Private Client & Trusts
E.: dls@jpintegra.com | T.: +1 345 745 2581
Address: Governor’s Square, 23 Lime Tree Bay Avenue, Grand Cayman, Cayman Islands.

It was first published in the current STEP ‘Trust Cayman’ Supplement