Cayman Islands: STAR Trusts

Last Updated: 3 June 2008
Most Read Contributor in Cayman Islands, September 2018

Introduction

The Cayman Islands introduced its own unique form of non-charitable purpose trust legislation in late 1997. The statute, called the Special Trusts (Alternative Regime) Law, 1997 (or STAR Law) is a significant departure from the original Bermuda model, which has been substantially copied by the British Virgin Islands and many other offshore jurisdictions. Cayman decided to go its own way, partly due to concerns that the original Bermuda model (which was introduced in 1989) raises some significant and as yet unanswered questions relating to certainty, controllability by the courts and the requirement that trusts for persons and trusts for purposes should be mutually exclusive. The STAR law has now been consolidated with and is contained in Part VIII of the Trust Law (as amended).

CHARACTERISTICS OF A STAR TRUST

Alternative regime

The idea of the STAR law is to create an alternative regime under which a new trust can be created. The STAR law will not affect existing ordinary trusts or powers and a special trust (a STAR trust) must state that the STAR law is applicable. We did not want to exclude the vast body of English and Commonwealth case law relating to personal trusts. To that end, the STAR law expressly provides that the law relating to STAR trusts and powers is the same in every respect as the law relating to ordinary trusts and powers save as provided in the STAR law.

The objects of a STAR trust or power may be persons or purposes or both. The persons may be of any number and the purposes may be of any number or kind, charitable or non charitable, as long as they are lawful and not contrary to public policy. It is a requirement that at least one trustee of a special trust is a trust corporation licensed in the Cayman Islands.

Enforcement and enforcers

With a trust for persons, the beneficiaries normally have a right to enforce the trusts against the trustees. For charitable trusts in Cayman, the attorney general has the right to enforce the trust for charity or the public interest. Clearly, in the case of a non-charitable purpose trust, enforcement is a potential problem. The STAR Law permits the settlor to specify in the trust instrument who will have standing to enforce the STAR trust. The deed should provide for successor enforcers. An enforcer need not be a beneficiary. Under certain circumstances the Court also has jurisdiction to appoint enforcers and if there is no enforcer who is of full capacity, the trustee must within 30 days apply to the Court for the appointment of an enforcer. The STAR law also allows the trust deed to specify whether the enforcer is to be subject to a duty to enforce the trust or whether the enforcer is to be free from any such duty. However, in the absence of express provisions in the deed, there is a presumption that an enforcer has a fiduciary duty to act responsibly with a view to the proper execution of the trust.

Uncertainty no issue

Another traditional conceptual problem relating to non-charitable purpose trusts concerns the uncertainty as to their objects or their mode of execution. The STAR Law provides that a STAR trust is not rendered void by any such uncertainty and that the deed may give the trustee or any other person power to resolve any uncertainty as to the objects of the trust or its mode of execution. There are further powers for the Court to resolve any uncertainty:

  1. by reforming the trust;

  2. by settling a plan for its administration; or

  3. in any other way it deems appropriate.

No perpetuities restrictions

STAR trusts are not subject to the rule against perpetuities, which makes it possible to have a STAR trust which has an unlimited life.

Reform the trust

If a STAR trust becomes:

  1. impossible or impracticable;

  2. unlawful or contrary to public policy; or

  3. unsuitable by reason of changed circumstances to achieve the general intent of the trust, and the trust cannot be reformed pursuant to the terms of the deed, the trustee is obliged to apply to the court to reform the trust cy-pres.

USES OF A STAR TRUST

It is felt that STAR trusts will prove to be very useful planning tools. A few examples of the possible uses of STAR trusts are set out below:

Pure purpose trust with no individual beneficiaries

A STAR trust can be a pure non-charitable purpose trust where there are no individual beneficiaries. The purpose of the trust could be, for example, investing in and promoting the growth and development of a particular company or business group. This will be particularly useful in cases where the patriarch of a family is concerned about who will succeed him in the ownership and control of the family businesses. One of the anticipated uses is that of ownership of a private trust company which will act as trustee of various family trusts thereby giving consistency and control over the administration of the family trusts. The trust can be perpetual and the trustees will be relieved of much of the burden of diversification of the trust assets and other risk related problems. However, care should be taken not simply to state the purpose of the trust to be to hold the shares of a particular company (which is sometimes referred to as a "self-serving purpose"), because this language is directed towards the form in which the assets should be held, rather than the way in which they should be applied. A trust structured along these lines runs the risk of being treated as a failed disposition of the beneficial interest because of the lack of any beneficiary or proper purpose within the structure.

Pure purpose trust with beneficiaries

The unique advantage of a STAR trust over non-charitable trusts of some other jurisdictions is that a STAR trust can be structured as a pure purpose trust with no beneficiaries or can be created for non-charitable purposes and for the benefit of individual beneficiaries. This significantly increases planning flexibility as it means that in the scenario of the succession to the family businesses described above, income and principal can be paid to members of the family, if appropriate.

Substitute for traditional trust for persons

It should be remembered that a STAR trust can be used as a substitute for a traditional trust for persons when it is not necessary to have a trust for non-charitable purposes and that the advantages of perpetuity and the exclusion of certain traditional beneficiary rights (see below) would still apply.

Restricting the enforcement and information rights of beneficiaries

In the case of a STAR trust for purposes with beneficiaries or where a STAR trust is used as a traditional trust for persons, the rights of beneficiaries to enforce the trust and/or to obtain information relating to the trust can be restricted. For example, where a settlor wishes to provide for his children and grandchildren but is aware that, after his death, one of his children (with whom, perhaps, his relationship has been stormy) will challenge the trust arrangements, the right of that child to obtain any information or enforce the trust (ie. take the trustees to court) can be excluded and vested in a different person as enforcer. This feature should be of considerable comfort to settlors and trustees alike!

International structured finance transactions

In a commercial context, STAR trusts can be used in place of charitable trusts as the owners of Special Purpose Vehicles (SPVs) in international structured finance transactions.

Substitute for charitable trust

STAR trusts can be used as substitutes for charitable trusts where, for example, the settlor wishes to control who has the right to enforce the trusts. They are also useful in circumstances where it is not entirely certain that the proposed charitable objects would be regarded as wholly charitable under Cayman law.

Cayman Islands

Grant Stein, Partner

Andrew Miller, Partner

Anthony Partridge, Associate

Garry Mason, Associate

Jersey

Peter Harris, Partner

David Pytches, Associate

British Virgin Islands

Christopher McKenzie, Partner

Hong Kong

Carol Hall, Partner

Dubai

Rod Palmer, Partner

London

David Whittome, Partner

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.

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