Introduction

With Cayman Islands STAR Trusts, we’re talking about a fresh twist on trust structuring that’s breaking new ground. This handy guide unwraps what makes STAR Trusts special, focusing on their standout features, perks, and real-world uses. It’s clear why they’re the go-to pick for folks wanting to guard and grow their riches over time with smart succession planning. The treasures of STAR Trusts are just waiting to be discovered, promising peace of mind for safeguarding wealth like a vault.

Understanding Cayman Islands Star Trusts

STAR Trusts were introduced by the Special Trusts (Alternative Regime) Law 1997 (STAR Law) which has been incorporated into Part VIII of the Trusts Act of the Cayman Islands. STAR Trusts are unique to the Cayman Islands and offer a statutory trust option that can be established for persons, purposes (both charitable and non-charitable), or both. The STAR Laws only apply where the trust instrument expressly states that they are to apply. This form of trust was introduced to overcome some of the difficulties associated with the use of more conventional offshore asset protection trusts in the Cayman Islands.

Features of STAR Trusts and How They Differ from Ordinary Trusts

Feature	STAR Trusts	Ordinary Trusts
Purpose	STAR Trust may be established for any lawful persons or purposes, including charitable, non-charitable, or mixed purposes. The terms of the trust offer broad flexibility in objectives.	Typically established for specific beneficiaries, often limited to charitable or familial purposes.
Perpetuity Period	No fixed perpetuity period; can potentially exist indefinitely, facilitating long-term estate planning and wealth preservation across generations.	Subject to a 150-year limit, though the Perpetuities (Amendment) Act, 2024 (and its 2025 revision) has since removed this restriction for most non-charitable trusts, allowing them to exist indefinitely.
Enforcer Role	Features an Enforcer who ensures the trust fulfills its purposes and has the exclusive right as well as duty to enforce the trust. This role separates the beneficiaries of a STAR Trust from the enforcement of the trust.	Lacks a formal Enforcer role; trustees themselves ensure the trust’s purposes are met, combining management with enforcement.
Trustee Requirements	Requires a licensed Trust Corporation to act as a trustee, ensuring professional management and governance.	The trust and its administration can often be managed by individuals or corporate trustees without specific licensing requirements, depending on jurisdiction.
Legal Framework	Governed primarily by the provisions of the STAR Law, which is specifically tailored to their unique structure and purposes.	Governed by general trust laws applicable in the jurisdiction, without specific laws tailored uniquely to them.

Essential Requirements for a STAR Trust

Express Provision

Every STAR Trust must be established through a written instrument, and it must explicitly state that the STAR Regime applies. This ensures that the settlor clearly opts into the STAR Regime. Aside from the unique provisions of the STAR Regime, the trust’s operations align with traditional trust law.

Role and Rights of the Enforcer

STAR Trusts are unique in that they require the appointment of one or more enforcers, and understanding the role of enforcers is key, as they are the only individuals with the legal standing to enforce the trust. Enforcers can be appointed by the settlor at the creation of the trust or through the trust instrument or a court order. These enforcers can be either individuals or corporate entities, including beneficiaries, the settlor, or any protectors of the trust.

The enforcer’s role may either be a right or a duty. If there is no beneficiary capable of enforcing the trust, there must be at least one enforcer who is obligated and able to enforce it. The court can intervene to appoint an enforcer if necessary.

Enforcers have fiduciary duties similar to those of trustees, meaning they must act responsibly and in the best interest of the trust’s proper execution. They have the right to direct the administration of the STAR Trust, access trust information, and seek legal remedies similar to those available to a beneficiary of an ordinary trust. They can approach the Cayman court for directions regarding the administration of the STAR Trust when necessary and are entitled to access and obtain copies of documents concerning the trust. Additionally, in cases of a breach of trust, enforcers have the authority to pursue personal and proprietary remedies against the trustee or third parties, akin to a beneficiary’s rights in conventional trusts. Furthermore, like trustees, enforcers are entitled to indemnification from the trust fund for expenses incurred in the performance of their duties, ensuring they are not personally at financial risk while managing the trust responsibilities.

STAR Trusts can be designed to restrict or remove the rights of beneficiaries to enforce the trust or to obtain information about the trust fund and its administration. Instead, these rights to information are vested in an independent enforcer. This arrangement is particularly useful for ensuring that the trust is administered in line with the settlor’s intentions without direct beneficiary interference, which can be crucial in cases where preserving the intent of the trust and protecting its assets from beneficiary disputes is a priority.

The recent case of AA v JTC (Cayman) Ltd FSD 12 of 2024 (IKJ) provides a significant legal precedent for the role of the enforcer, confirming that an enforcer of a STAR Trust has standing to seek the court’s blessing for a “momentous decision” on the same legal basis as a trustee. This ruling reinforces the Enforcer’s authority, providing a clear legal pathway to seek judicial guidance and adding a vital layer of security to the structure.

Trustee Requirements

A STAR Trust must have at least one trustee who qualifies as a ‘Trust Corporation’ as defined under Section 2 of the Cayman Trusts Act: 

“…means a body corporate licensed to conduct trust business, with or without restriction, under the Banks and Trust Companies Act (2021 Revision) or registered under that Act as a controlled subsidiary or a private trust company;”

However, co-trustees not meeting this definition are allowed as long as there is one qualifying trustee.

Certainty and Reform of Purposes (Cy-près)

The term “cy-près” is from Norman French and is conventionally understood, in the context of the reform of gifts for charitable purposes, to mean that the purposes of a trust must be followed “as near as possible to” the original intention of the settlor. In the context of STAR Trusts in the Cayman Islands, the cy-près doctrine allows for the reformation of a trust when its execution becomes impossible, impractical, unlawful, or contrary to public policy due to changed circumstances, ensuring that the trust’s general intent continues to be achieved.

The non-charitable purposes of a STAR Trust must not be contrary to public policy and the laws of the Cayman Islands. The trust should not be void for uncertainty regarding its objectives or execution. The trustee or another appointed person has the power to resolve uncertainties, and if necessary, the Cayman judiciary can also intervene to reform the trust through an order of the court.

The case of CIBC Bank and Trust Company (Cayman) Limited v T & S (CIBC v T & S) serves as an example of applying the cy-près doctrine in the context of STAR Trusts. In this case, the trustee applied to the Cayman court to reform the trusts cy-près because the execution of the trusts had become obsolete due to the primary beneficiary’s decision to relocate to a different tax jurisdiction. This change meant that the original intent of the trust could not be achieved under its current terms.

The court accepted that, due to these changed circumstances, the original intention of the trust could not be fulfilled without reform. Consequently, it exercised the power of reformation under the cy-près doctrine, which in this scenario, meant adjusting the trust in a manner that would adhere as closely as possible to the settlor’s original intent, while accommodating the new circumstances. This decision provided valuable guidance on the application of the cy-près doctrine to STAR Trusts, confirming that it should be interpreted similarly to its application in charitable trust contexts.

Land in the Cayman Islands

A STAR Trust is not allowed to directly or indirectly hold land in the Cayman Islands. It can, however, hold interests in entities that own Cayman land as part of their business operations.

What Can a STAR Trust be Used for?

Commercial Uses

• Ownerless Special Purpose Vehicles: STAR Trusts are often used to make Special Purpose Vehicles (SPVs) “ownerless” in commercial contexts. This is beneficial for holding assets off the balance sheet or creating bankruptcy-remote structures. Private enforcers appointed for these trusts reduce enforcement risks and enhance privacy, unlike traditional charitable trusts which rely on the Attorney General for enforcement. This means that in structured finance and other transactions, STAR Trusts function as SPVs, facilitating “off-balance sheet” or bankruptcy-remote transactions by being unconnected with the original transaction parties.
• Operating Companies: They are used for holding operating companies in a way that limits trustee involvement in the daily business operations or for investing in family businesses with uncertain economic performance.
• Running the Family Business: STAR Trusts can be used to ensure continuity of their businesses post-mortem. The trust holds shares in the business, allowing directors to continue operations.

Family and Estate Planning Purposes

• Orphaning Private Trust Companies: STAR Trusts are utilised to orphan private trust companies which act as trustees of family trusts. This arrangement allows families to maintain greater oversight compared to using an unconnected trust company.
• Dynastic Trusts: Due to their exemption from the 150-year perpetuity limit, STAR Trusts serve well in establishing perpetual private or family trusts, a key strategy in long-term estate planning.
• Acting as the Trustee of a Private Trust Company: Commonly, a STAR Trust is established to own shares in a Private Trust Company, which then acts as the trustee of one or more trusts, potentially across various jurisdictions. This setup avoids succession issues regarding PTC ownership.

Philanthropic and Social Benefit Projects

STAR Trusts support public and private social benefit projects like maintaining community facilities or preserving monuments, such as funding an opera house or political causes.

Each of these uses demonstrates the versatility of STAR Trusts in accommodating a wide range of needs, from commercial structuring and family governance to philanthropy and managing beneficiary entitlements.

Commercial Applications

STAR Trusts are also used for a variety of other sophisticated commercial applications:

Pre-IPO Planning: Founders and substantial shareholders often use STAR Trusts to hold their shares in the period leading up to an Initial Public Offering (IPO). This provides asset protection and stability to the holding, insulating the IPO process from personal events such as death or divorce that could otherwise cause fluctuations in share price or delay the offering.

Employee Benefit Trusts (EBTs) and Master Insurance Policies: The perpetual and purpose-driven nature of a STAR Trust makes it an ideal framework for managing long-term employee share incentive schemes and for holding master insurance policies for multinational companies. These trusts ensure the continuity of benefits and coverage, remaining unaffected by corporate changes or insolvency, while providing a neutral, tax-efficient vehicle for managing claims and distributions globally.

Why Choose a Cayman Islands Trust? 

The Cayman Islands offer several advantages that make it an attractive jurisdiction for establishing trusts, including:

• Firewall Legislation: The Cayman Islands’ Trusts Act includes firewall legislation that protects Cayman trusts from external claims on trust property. This includes challenges from forced heirs or claims stemming from personal relationships with a beneficiary. It also offers protection against foreign judgments that disregard the provisions of Cayman’s Trusts Act.
  In a 2019 amendment, the firewall was enhanced to extend its protections to claims related to any beneficiary, including discretionary beneficiaries. While the law provides statutory protection, a practical application for settlors is to ensure that the trust’s assets are physically located in a jurisdiction with similar robust legal protections, such as the Cayman Islands. This guards against the possibility of a foreign court order attaching directly to assets situated within that foreign jurisdiction, thereby maximizing the firewall’s intended effect.
• Flexible Company Laws: The Cayman Islands boast company laws that are flexible and adaptable, aligning well with the rules of most major stock exchanges. This flexibility is crucial for the incorporation of companies that need to operate internationally.
• Sophisticated Judicial System: The jurisdiction is known for its sophisticated and reliable judicial system, which is an essential consideration to properly administer and enforce a STAR Trust.
• Global Recognition: Cayman is globally recognised as a premier offshore financial hub, which adds to its appeal as a jurisdiction for trusts and other financial structures.
• Tax Neutrality: The Cayman Islands offer tax neutrality, meaning there are no direct taxes imposed on trusts established there. This is beneficial for maximising the financial efficiency of the trust assets.
• International Compliance Standards: Cayman adheres to international compliance standards, ensuring that its financial practices meet global regulatory expectations and help in maintaining a reputable financial environment.
• Cost Efficiency and Ease of Incorporation: Establishing companies and trusts in the Cayman Islands is not only cost-efficient but also streamlined, which makes it easier for individuals and corporations to set up and manage their trusts.

These factors collectively contribute to making the Cayman Islands a preferred jurisdiction for setting up trusts, particularly for those seeking robust legal protections, fiscal advantages, and international acceptability.

STAR Trusts Recognised Outside of Cayman Islands

Despite initial concerns about the recognition of STAR Trusts outside the Cayman Islands, there have been no reported cases that successfully challenge their validity or refuse to recognise them as valid trusts in other jurisdictions. A STAR Trust typically fits within the definition of a ‘trust’ under The Hague Convention on the Law Applicable to Trusts. Since Cayman law, which is the law chosen by the settlor, governs the validity of a STAR Trust, it follows that in countries that have ratified the Convention, a STAR Trust should generally be recognised as a valid trust. This international recognition underscores the effectiveness and robustness of STAR Trusts as a legal and financial instrument.

Conclusion

STAR Trusts represent a sophisticated tool for strategic wealth management and legacy planning, offering unparalleled flexibility and security alongside other structures like testamentary trusts. Their ability to accommodate a wide range of purposes, combined with the robust legal protections offered by the Cayman Islands, makes them a compelling choice for individuals and families looking to preserve and enhance their wealth across generations.

For those considering establishing a STAR Trust or seeking to understand more about their potential applications, consulting with experienced legal professionals is crucial. Our estate planning lawyers at PBL Law Group are equipped to provide the expert guidance and support needed to navigate the complexities of STAR Trusts and maximise their benefits for your estate planning needs.

Frequently Asked Questions (FAQ)