Is STAR the solution?
The Special Trusts (Alternate Regime) Law, 1997 introduced the Cayman Islands version of non-charitable purpose trust legislation and is commonly known as the ‘STAR Law’. This legislation has subsequently been integrated into the Trust Law, the most recent revision of which is the 2011 Revision.
Whilst it is estimated that over 50% of trusts in Cayman are created under the STAR Law, it is arguable whether the STAR Law has been utilised to its full potential.
In order to obtain a better understanding of the STAR Law, it is helpful to consider some of its specific characteristics and examine the uses for the STAR trust, consider its perceived shortcomings, compare what the STAR Law offers relative to other foreign jurisdictions and establish how we could do greater justice to this addition to our trustee services arsenal.
Specific characteristics/uses for the STAR Trust:
The STAR Law enables greater flexibility in setting the objects of the trust. It allows the objects to be persons, purposes or both.
- The STAR Law enables a trust to be set up with the objective of corporate ownership whilst control remains in the hands of the directors. This allows a trustee to mitigate the assumed risk of owning shares in companies which it does not manage. It is clear to see the difference from the standard discretionary trust in which the trustee must actively manage all assets and is fully responsible for all actions which have taken place.
- The STAR Law enables a Settlor to tailor enforcement rights such as the ability of beneficiaries to access the courts and trust information. Under the STAR Law, the power to take legal action against the trustee does not lie with the beneficiaries, but with parties known as Enforcers. It should be noted that one or more beneficiaries, but not necessarily all, can be appointed as Enforcers. That Enforcer will have access to all trust documents and may have prior knowledge of the parties and interests concerned.
- The STAR Law offers a doorway to compromise where a dispute has developed and mediation or arbitration are the preferred routes rather than court action. Any application to the court can be extremely costly to the trust fund and beneficiaries, that is to say nothing of potentially damaged relationships resulting from court action.
- The law against perpetuities need have no application. Standard discretionary trusts are subject to The Perpetuities Law (1999 Revision).
A STAR trust can be used in any of the standard personal scenarios where the creation of a trust is desirable.
“Whilst it is estimated that over 50% of trusts in Cayman are created under the STAR Law, it is arguable whether the STAR Law has been utilised to its full potential.”
Other uses for STAR trusts include the ownership of the shares in Private Trust Companies, roles within the institutional trust arena such as ownership of Special Purpose Vehicles in certain securitisation transactions and the ownership of founder shares of mutual funds.
Are there any shortcomings of the STAR legislation?
Some practitioners have questioned the integrity of the Trust Law on the basis that it has not been tested and approved by the courts. Whilst it is true that there is not the same wealth of case law that has molded the traditional trust, this should be interpreted as a positive reinforcement of the careful drafting, illustrates that the legislation is robust and that the ability to seek the assistance of mediation/arbitration rather than reversion to the courts, is effective.
If, for whatever reason, it is decided to amend the proper law of a Cayman STAR trust it must be accepted that some of the attractive Cayman specific provisions may have to be deleted as a result.
When considering a change of jurisdiction many factors must be considered and an analysis performed as to whether the alternative jurisdiction has the same reputation as the Cayman Islands for quality service and political stability.
Conclusion and thoughts for the future
In conclusion the STAR Law is a very versatile piece of legislation which provides the international trust practitioners with increased planning flexibility. Dependent on the complexity of the requirement this may be very welcome when designing and developing a structure.