December 7, 2021

Cayman Islands Star Trusts

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Screen Shot 2016-08-16 at 10.24.04 AMFrom Mourant Ozannes

The Special Trusts Alternative Regime or “STAR” is a creature of statute. It was introduced in the Cayman Islands by the STAR Law in 1997 but since then, has been
incorporated in Part VIII of the Cayman Islands Trusts Law, appearing in the 2011 Revision at sections 95 to 109.

What are STAR trusts?

STAR allows for the valid creation and enforcement of non-charitable purpose trusts. The common law rules relating to ordinary private trusts remain to the extent that they are not altered by the STAR provisions of the Trusts Law.

Features and requirements

There are several reasons why STAR trusts have proved so popular. One of the primary reasons is their flexibility.
They can be indefinite in duration. The rule against perpetuities does not apply to a trust or power subject to the STAR regime. To address fears that this may result in the trust property being held in a structure which has fallen out of step with convention or public policy or developments in the law, there is
a procedure set out in the Trusts Law for reforming the trust either in accordance with the terms of the trust or by application to court.
There is no need for named beneficiaries. STAR trusts can be validly established for the benefit of any number of persons or purposes (charitable or non-charitable) or a mix of both, subject only to legality and public policy considerations. This means they can be used
in a commercial, philanthropic or family estate planning context or even in a mix of all three.
There is no reason why a STAR trust cannot have a protector, if that is what the settlor wishes.
A STAR trust must have an “Enforcer” who is chosen by the settlor. There can be one enforcer or there can be more than one. The enforcer can be a family or individual’s
trusted adviser or a council or committee of enforcers can be established. Beneficiaries (if there are any) have no rights to enforce a STAR trust or to receive information about the STAR trust or its administration, nor do they have enforceable rights against the trustee or enforcer or to the trust property.
The only person with the standing to enforce the trusts of a STAR trust is the enforcer and if for whatever reason, there is no enforcer or no enforcer who is able, willing and fit to undertake the task, the trustee must apply to court and the court will appoint one. The trustee is obliged to apply to court for the appointment of an enforcer within thirty days of it being advised of those circumstances arising (a process which we would be delighted to assist with) and if the trustee knowingly fails to make that application, the court can impose a fine of $10,000.
Subject to the terms of his appointment, in the event of a breach of trust, the enforcer has the same personal and proprietary remedies against a trustee and third parties in relation to the trust as a beneficiary of an ordinary private trust; an enforcer also has a right to be informed of the terms of the STAR trust and to receive information about the trust and its administration and to inspect and take copies of trust documents. Again, subject to the terms of his appointment, an enforcer can apply to the court for an opinion, advice or directions. He has the same rights as a trustee of an ordinary private trust to protection and indemnity in relation to the discharge of his duties and responsibilities and can apply to court for relief from liability.

BRIEFING

A STAR trust must be in writing and it must contain a declaration that Part VIII of the Trusts Law is to apply, failing which it will be regarded as an ordinary private trust and thus subject
to the common law requirements for the establishment of a valid trust.
The trustees of a STAR trust must include a “trust corporation”, meaning the holder of a trust company licence granted pursuant to the Cayman Islands Banks & Trust Companies Law (as revised) or a company registered as a private trust company under that Law. The trustee must keep at its registered office in the Islands, a documentary record of the terms of the STAR trust, records confirming the identity of the trustees and enforcers, all settlements of property upon the trusts of the STAR trust, the identity of the settlor(s) and the property subject to the STAR trust as at the end of each of its accounting years, including a record of any distributions or applications of the trust property.
The trustee of a STAR trust must ensure when accepting property on the terms of a STAR trust that the settlor or person making the settlement on his behalf understands who will have standing to enforce the STAR trust. If the trustee fails to do so, the trustee will be at risk of criminal sanction upon summary conviction to a fine of $10,000 and imprisonment for a year or on conviction on indictment, to a fine of $100,000 and imprisonment for five years.
It is strongly advisable therefore for a trustee of a STAR trust to ensure that it obtains the necessary confirmation of the communication of this information to and understanding from the relevant person before accepting trust property on the terms of a STAR trust. We can of course assist trustees to ensure that they have satisfactorily discharged these obligations.

Some examples of their use

STAR trusts have proved popular with settlors who have a philanthropic purpose in mind which may not necessarily fall within the strict definition of what is “charitable”. By creating a STAR trust for that philanthropic purpose, the settlor removes the uncertainty and risk as to whether it would be construed as charitable if ever subject to challenge.
STAR trusts have also proved popular for the holding of shares in a family business, particularly if a settlor is concerned to preserve the ethos of the business after his death. STAR trusts are also commonly used for dynastic estate planning as well as in commercial transactions such as unit trusts.
Mourant Ozannes can advise on the suitability of a new or existing STAR trust, its drafting and structure.

For more briefings visit mourantozannes.com

This briefing is only intended to give a summary and general overview of the subject matter. It is not intended to be comprehensive and does not constitute, and should not be taken to be, legal advice. If you would like legal advice or further information on any issue raised by this briefing,
please contact one of your usual Mourant Ozannes contacts.

Contact:

Robert Mack, Senior Associate, Cayman Islands
+1 345 814 9102

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