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Estate Planning in the Cayman Islands

Arka Legal Services

As one of the world’s busiest international financial centres, the Cayman Islands attract people whose property is often located in multiple jurisdictions. For this reason, close attention ought to be paid to the arrangement of property and affairs in such a way as to ensure the most effective method of distribution of assets. In particular, attention should be paid to the rules of all jurisdictions in which property is owned, especially in regard to the taxation of an estate. Regard also needs to be had to any decision which may be made to decline to leave a gift to any close family member.

The formalities for the creation of a will in the Cayman Islands are set out in the Wills Law (2004R), which is largely based on the English Wills Act (1837). The basic requirements for a valid will are that it must be:

  1. In writing;
  2. Signed by the testator;
  3. In front of two witnesses; and
  4. The testator:

              a. Is over 18;
              b. Intends to make a will; and
              c. Has the necessary mental capacity to make the will.

An important point to keep in mind is that a will is revoked by marriage. Therefore, a new will should always be executed after a marriage. A significant point of divergence from English law is that wills in the Cayman Islands are not affected by divorce. These rules make it clear that any significant change in circumstances – marriage, divorce or the birth of children – should always be followed by a new will, to reflect and accommodate that change.

Foreign Assets
For local residents with foreign assets, it is important to be conscious of the rules applicable in the country in which the foreign assets are held. A will prepared in the Cayman Islands will not always govern the distribution of foreign assets. For this reason, it is advisable to prepare multiple wills, so that the assets in each jurisdiction are dealt with according to the wishes of the testator, but also in accordance with the local rules governing the distribution of an estate.

Although there is no inheritance tax in the Cayman Islands, there is such a duty imposed in many countries in which assets may be held. For example, in the United Kingdom, all assets in an estate valued over £325,000 will, as a general rule, be subject to an inheritance tax of 40%. Clearly, this can be a very significant burden on an estate.
There is, therefore, often a great deal of benefit to be derived from structuring one’s affairs in such a way that there is a minimal exposure to tax. This may take the form of expatriating assets from jurisdictions in which inheritance tax is imposed, or moving assets into a legal vehicle such as a company or a discretionary trust, so that the assets are not in the hands of the testator at the date of death. Both of these options would also potentially avoid the need for multiple wills.

The purpose of these steps is to ensure that the value of the estate is not significantly reduced by taxes, charges, or even legal costs. It is also desirable that the estate be distributed according to the wishes of the testator, rather than any specific rules which may be found in particular jurisdictions. For example, in countries in which Sharia laws apply, there are strict rules governing distribution of assets, and these can only be varied only to a very limited extent.

Powers of Attorney
A power of attorney is an instrument by which a donor gives another person the power to carry out transactions on their behalf, or deal with their property. In doing so, they must act within the scope of the instructions from the principal. Cayman has no scheme of enduring powers of attorney, which means that any power of attorney issued under local legislation will expire automatically upon the expiration of a set period, upon the death of the donor, or in the event of the mental incapacity of the donor.

Therefore, a power of attorney can be a useful instrument for someone travelling abroad, or who is, for some other reason temporarily unable to attend to their affairs. However, it is not the best choice of instrument for aging property owners, who may be at risk of losing legal capacity.

Testamentary Discretion
As a general proposition, in common law countries, every person has the right to decide how their assets are divided upon their death. This is referred to as “testamentary freedom”. This includes a decision made by the testator to exclude a close family member from their will, such as a child or spouse.

In many countries, this freedom has been overridden by statute, so that children, spouses, and even grandchildren may have the right to claim on an estate if there is not adequate provision made for them in a will. However, no such legislation exists in the Cayman Islands.

This means that there are very limited avenues available to a family member who has been excluded from a will. Generally, the only course open to a disappointed family member who believes they have been unfairly excluded is to challenge the validity of the will itself.

With limited exception, there are two major grounds for contesting a will. The first is invalidity on the basis of a failure to comply with the formalities required by the Wills Law. The second is a lack of testamentary capacity, whether through mental impairment, or the undue influence of a third party.

Invalidity is relatively straightforward. If any of the requirements set out in the Law are missing – such as two witnesses, or the signature of the testator – then the will is invalid. However, showing a lack of testamentary capacity can be much more difficult. It must be shown that the testator failed to understand the extent of their estate, the potential claimants on their estate, and the nature of the moral claim they may have. Proving this can be a lengthy and expensive process.

If a challenge is successful, the will is declared to be invalid, and any prior, valid, will should be admitted to probate. If there is no valid prior will available, then the rules governing the distribution of assets on intestacy will be applied.

The costs of both sides involved in such a dispute will usually be paid from the estate, unless either side has behaved in such a way that leads the court to require them to pay their own costs.

It is therefore clear that, when drafting a will, there are many important issues to bear in mind. The location of the assets must be the first consideration, which then leads in to the question of how those assets are to be distributed. Failing to make proper arrangements in advance may result in a substantial reduction in the total value of the assets of an estate, and therefore a diminution in the value of the gifts received by chosen beneficiaries.