STAR trusts in the Cayman Islands
03 April 2020
In 1997 the Cayman Islands introduced a then unique form of non-charitable purpose trust legislation called the Special Trusts (Alternative Regime) Law (or "STAR Law"), as now presently consolidated with, and contained in Part VIII of, the Trusts Law (2020 Revision).
Characteristics of a STAR Trust
The concept of the STAR Law was to create an alternative regime under which a new type of trust could be created known as a special trust (a "STAR Trust"), the trust instrument of which must state that the STAR Law is applicable. 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 or a controlled subsidiary or a private trust company registered as such in the Cayman Islands.
Enforcement and enforcers
In order for any sort of trust to be valid, there needs to be someone who can "enforce" it, as against the trustees. In other words, to hold the trustees to account. With a trust for persons, the beneficiaries normally have this right. In the case of charitable trusts in Cayman it is the Attorney General. In the case of a non-charitable purpose trust, enforcement was seen as a potential problem. The STAR Law requires a STAR trust to specify who will have standing to enforce the STAR trust, who 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 apply within 30 days to the Court for the appointment of an enforcer. The STAR Law also permits the trust instrument 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. In the absence of express provisions, there is a presumption that an enforcer has a fiduciary duty to act responsibly with a view to the proper execution of the trust.
A further conceptual problem traditionally associated with non-charitable purpose trusts concerns any possible 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 trust instrument 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:
- by reforming the trust;
- by settling a plan for its administration; or
- 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 of unlimited duration.
Reform the trust
If a STAR trust becomes:
- impossible or impracticable;
- unlawful or contrary to public policy; or
- 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 trust instrument, the trustee is obliged to apply to the Court to reform the trust cy-pres.
Uses of a STAR trust
STAR trusts have proven to be very useful planning tools. A few examples include:-
Pure purpose trust with no individual beneficiaries
The purpose of which could be, for example;
- investing in and promoting the growth and development of a particular company or business group; or
- holding a private trust company which will act as trustee of the various family trusts thereby giving consistency and control over the administration of the family trusts.
Hybrid purpose and purpose trust
For example, in the scenario of the succession to a family business, 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
For instance, 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 can be excluded and vested in a different person as enforcer.
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.