Cayman Islands law is based on English law so, unlike many civil law jurisdictions, the Cayman Islands do not need to legislate to include the concept of trusts within their laws. Trusts can be traced back over 1,000 years and are as indispensable to common law countries as they are unknown to civil law countries.
A trust arises where a person (an individual or a company) holds property in his own name but may not treat that property as if it were his own; he holds that property "on trust" for somebody else. The person holding the property is called the trustee and the person for whose benefit he is holding the property is called the beneficiary.
The property that the trustee holds for the beneficiary is often called the trust fund. The trust fund is not available to the creditors of the trustee because the trust fund is not an asset of the trustee even if it is in his name. This the heart of the trust: the trust separates the legal ownership of the property in that, as regards the outside world, it looks as though the property belongs to the trustee but, as between the trustee and the beneficiary, the beneficiary owns the economic value of the trust fund and the trustee must manage and deal with the trust fund not in the interests of the trustee but in the interests of the beneficiary.
The ability, as a matter of law, for property to be held by a trustee allowing beneficiaries either concurrently or successively to have interests in the economic value of the property offers an alternative and more flexible way to bind persons together to give them joint rights over an asset beyond what can be achieved by mere contract law.
Trusts are therefore a popular mechanism for structuring personal as well as commercial transactions outside the limits of what can be accomplished as a matter of contract.
In the Cayman Islands, the use of trusts to achieve commercial objectives is as common if not more so than the use of trusts for holding family wealth to pass to succeeding generations. Trusts are used, for example, as pooling arrangements for collective investment structures (often known as unit trusts) and to hold shares in special purpose companies where the trustee, as shareholder, can be subject to restrictions on how the shares in that company are dealt with. Likewise, trusts are useful to hold the shares in joint venture projects where the disinterested trustee manages the joint asset and the investors' relationship.
Because a trust is a relationship regarding property and not a legal person in its own right, it is the trustee and not the trust that is and should be regulated. Trustees in the Cayman Islands are well-regulated. For over 30 years, all foreign companies wishing to conduct trust business in the Cayman Islands and all Cayman Islands companies wishing to conduct trust business anywhere in the world have to be approved and licensed by the Cayman Islands Monetary Authority. Before Cayman Islands trustees may accept property into a trust, they are required under Cayman Islands anti-money laundering regulations to verify the identity of the person transferring the property to them and the source of that property. Likewise, they are required to verify the identity of any persons to whom they distribute trust property.