Flight of fancy

Sunday, 01 December 2013

Flee clauses are a curious aspect of trust drafting. Ambitious in their scope and exotic by their nature, they are generally dismissed as historical oddities harking back to a time when settlors of international trusts1 and their advisors treated offshore jurisdictions with trepidation and unease.

Flee clauses purport to automatically transfer the trusteeship and administration of a trust from one trustee to another in an alternative safe-haven jurisdiction on the occurrence of certain (often extreme) events. Which events is a matter for the settlor to decide, but the classic examples include military invasion, civil war or unrest, expropriation of private property by government, and natural disasters. Less extreme events may include creditor avoidance, such as a creditor seeking to enforce a foreign judgment in the courts where the trustee or the trust fund is based. In any event, a question arises: are flee clauses relevant to modern trust drafting? If they are, what steps, if any, can be taken to improve their chances of success?

Choice of safe-haven jurisdiction

Before the drafting begins, the nature of the safe-haven jurisdiction must be considered. Investigations should be launched to ascertain the political stability, policy towards taxation of trusts, reputation of the courts, compliance regimes, and general suitability of the jurisdiction with respect to practical matters such as the time-zone and the presence of high-quality trust service providers.

The attitude of the courts of the safe-haven jurisdiction towards flee clauses must be considered. As a matter of law and public policy, would the courts uphold them or would they look upon them with suspicion? Much may depend on the circumstances of the case and the jurisdiction in question, but one can imagine a safe-haven court taking a more sympathetic view where the flee event falls into the extreme camp, such as a military invasion, and a less sympathetic view where, for example, creditor avoidance is the main motivation.

Even if a suitable safe-haven jurisdiction is located, circumstances could change. A recent example of this is the events in Cyprus in the early part of 2013, when the government instituted a wholesale expropriation of private bank accounts in an attempt to plug the gap in its balance sheet, following intense pressure from the Eurozone.2

Drafting the flee clause

Once a suitable safe-haven jurisdiction has been selected, the challenge of drafting the flee clause presents itself. The draftsman needs to strike a balance between trigger events that are too wide (which might trigger flight in response to rather innocuous events) and too narrow (which might defeat the intention of the settlor by failing to trigger flight when real danger strikes). Take, for example, the trigger expression ‘civil unrest’, a term often used in flee clauses but rarely defined. It is generally left to the trustee (or relevant power holder) to decide whether or not a demonstration, for example, constitutes civil unrest.

A real example that tends to surface in conversation whenever flee clauses are discussed is the assassination of the Governor of Bermuda, Sir Richard Sharples, in 1973. The aftermath of the assassination resulted in a declaration of a state of emergency on two occasions. The civil unrest that followed resulted in the flight of many Bermudian trusts to safe-haven jurisdictions. The reputation of Bermuda undoubtedly suffered as a result (at least in the short term), although business as usual returned in a short space of time.

On the surface, the declaration of a state of emergency seemed like a reasonable thing to include in any flee clause, but in the case of the assassination of the Governor of Bermuda it proved to be an overreaction and caused many trustees the loss of good business. In the Caribbean, a state of emergency can arise simply as the result of being hit by a severe hurricane. However, this does not mean trust assets, which are generally situated outside the jurisdiction in which the trustee resides, were ever at risk.

The opposite side of the coin is that drafting such clauses too narrowly may result in a failure to trigger a flee clause under the right circumstances, thus impeding the administration of the trust and potentially putting the trust assets at unnecessary risk.

Problems with flee clauses

Assuming a suitable flee clause has been drafted into the trust instrument and a trigger event occurs, what practical problems might arise?

The primary difficulties with migrating any trust are the mechanics involved, which tend to slow down the process. The outgoing trustee would normally expect, on retirement or removal, to secure contractual indemnities and would usually wish to vet the suitability of the incoming trustee. The incoming trustee would normally wish to familiarise itself with the assets of the trust and the terms of the trust instrument, and might wish to take legal advice on the same.3 Due diligence exercises would also need to be conducted to satisfy local anti-money laundering regulations. But could this be accomplished quickly enough to enable the flee clause to be effective in practice?

In addition, the legal transfer of trust assets would necessitate the giving of instructions to banks, investment managers, etc, and the completion of additional documentation to accomplish the same. If, however, a serious trigger event has occurred, for example an invasion by military force, the average trustee would be likely to face significant challenges to concluding the necessary administrative steps effectively. Trust assets situated in the same jurisdiction as the trustee would be vulnerable and practical difficulties could arise in transferring these assets to the safe-haven jurisdiction during a crisis. Assuming the mechanical steps could still be achieved when a legitimate trigger event has arisen, the sudden sale and/or transfer of trust assets could also trigger adverse tax consequences by crystallising trust assets that are pregnant with gain, or could otherwise corrupt a well-crafted and tax-efficient structure. This might have to be viewed as an acceptable cost of protecting the trust fund from disaster. Other points that need to be considered include the observance of restrictions in the trust instrument and a review of the legislation governing the trust instrument to ensure the transfer of the trusteeship is valid in both jurisdictions.4

It is more likely than not that the pace of the migration will be eclipsed by the pace of the triggering event. There are some techniques for avoiding delay. For example, if all the trust assets were held in a company, so that the sole assets of the trust were the shares in the company, the transfer of the shares would be relatively straightforward. Share transfer forms could be signed and held in escrow in anticipation. If this were coupled with, for example, a safe-haven trust that had been established for the sole purpose of receiving trust assets in crisis, this could be quite effective in ensuring a smooth transfer of assets to a new trustee.5

Given that the trustee would be in the midst of a triggering event, it may be advisable to consider vesting the power to migrate the trust in some other person,6 such as a protector or the settlor, who is not resident in the jurisdiction and who could therefore exercise the relevant power7 freely and quickly. Such a method could also be attractive to trustees as they would be relieved of responsibility (and the associated risks) for the forced migration.


Although in practice standard flee clauses are rarely triggered, the Cypriot and Bermudian examples remind us that such extreme events can and do occur and are unpredictable. Flee clauses can therefore remain relevant to the modern trust instrument in the right circumstances, and trust professionals should consider taking a fresh look at them before it is too late.

  • 1. Flee clauses do not generally appear in onshore trust deeds, in my experience
  • 2. The events in Cyprus may have triggered some flee clauses in Cyprus-governed trust instruments. However, that is pure speculation as I am not aware of any live cases arising from these events/fn] This underscores the need to keep vigilant with respect to the safe-haven jurisdiction. The presence of a flee clause may result in an obligation being imposed on the trustees (or the relevant power holder) to monitor developments in the safe-haven jurisdiction to ensure it continues to remain a viable choice for the trust if an emergency arises. It is therefore important to ensure there is flexibility in the trust instrument to allow a change of safe haven if circumstances require it.It may be wise to reserve powers with respect to a potential migration to persons other than the trustee, who may be unable to exercise powers to change the safe-haven jurisdiction where time is of the essence if events in its jurisdiction prevent it from acting quickly. It would be necessary to confirm that the law governing the trust instrument permits the reservation of powers. The Cayman Islands, for example, enables a wide range of powers to be reserved to the settlor or a person (or group of persons) nominated by the settlor
  • 3. A safe-haven trustee may be unaware that it has been nominated as such in the trust instrument unless it is a party to the trust instrument or a copy of the trust instrument has been provided in advance
  • 4. For example, in the Cayman Islands, appointment of trustees is usually by way of deed: s9 of the Trusts Law (2011 Revision). In the case of private purpose trusts (known as STAR trusts) at least one of the trustees must be or include a regulated Cayman Islands trust corporation or a private trust company
  • 5. It would not, however, avoid issues such as negative tax consequences arising
  • 6. In the Cayman Islands a wide range of powers (including powers of appointment over trust assets) can be reserved to the settlor or a person designated by the settlor in the trust instrument: s14 of the Trusts Law (2011 Revision)
  • 7. Perhaps even a general power to appoint trust assets to a separate trust and/or beneficiaries would be useful as long as either the trustee was free to exercise the power in the circumstances or the power could be vested in a third party such as a protector or the settlor, if appropriate
Author block
Robert Mack

Robert Mack TEP is an Associate at Appleby, Cayman Islands.

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