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06 December 2018
The Special Trusts (Alternative Regime) (STAR) Law 1997, now incorporated into Part VIII of the Trusts Law (Revised), introduced so-called 'STAR trusts' into Cayman Islands law.
STAR trusts are unique to the Cayman Islands. They are statutory trusts which can be established for:
The STAR laws apply only where expressly stated by the trust instrument.
STAR trusts were introduced into Cayman Islands law to overcome some of the difficulties arising from more conventional offshore trusts.
The purpose of a STAR trust can be any kind or number, provided that it is legal and does not contravene public policy.
Further, they can be established without a perpetuity period and therefore escape the general perpetuity period (150 years) that applies to other non-charitable Cayman Islands trusts.
The most significant innovation of the STAR trust is the introduction of 'enforcers'. Besides the courts, only enforcers have the power and duty to enforce STAR trusts.
STAR trusts must have a trust corporation or private trust company as a trustee or among its trustees (ie, a company licenced to conduct trust business in the Cayman Islands).
The standard trust law applies to STAR trusts, except where the STAR Law states otherwise.
STAR trusts have a number of different uses – and this number is growing. The most common uses are summarised below.
As STAR trusts are not limited to the 150-year perpetuity period that applies to other trusts, they can be an effective way of establishing perpetual private and family trusts.
Acting as the trustee of a private trust company
One of the most common uses of a STAR trust is as the head entity of a series of trusts (which can be established in different jurisdictions worldwide). It works as follows:
This structure can be used even where the trusts are not all within the same jurisdiction. For instance, a single STAR trust could own shares in a private trust company which is the trustee of trusts in, for example, the Cayman Islands, the British Virgin Islands or Jersey.
Running family businesses
It is also common for business owners to use STAR trusts to ensure that their business continues after their death. A STAR trust can be the holder of a company's shares both during the owner's lifetime and after their death (established by will, if appropriate) for a designated period.
Limiting information accessible by beneficiaries
STAR trusts are sometimes used to limit the information to which a trust beneficiary has access. Case law has clarified that beneficiaries of ordinary trusts may access a considerable amount of information relating to the trust. A properly drafted STAR trust can restrict those rights or even eliminate them entirely. The enforcement of the trust (and the associated rights to information) are then held by the enforcer.
Special purposes vehicles
STAR trusts are often used as special purpose vehicles in structured finance and other transactions. They allow the structuring of off-balance sheet and bankruptcy-remote transactions, as the STAR trust entity can be unconnected with the original parties to the transaction.
STAR trusts can provide an appropriate (and flexible) philanthropic mechanism, whereby the settlor's requirements fall outside the limited Cayman definition of what is charitable.
One of the most difficult aspects of establishing a STAR trust is the drafting of the purposes for which it is established. While the STAR Law contains rules to prevent STAR trusts from failing (eg, failure resulting from object and beneficiary uncertainty), there are a number of traps for the unwary.
Therefore, the purpose for establishing a STAR trust must meet certain minimal standards. Failure to do this can cause significant problems with regard to the trust's operation and validity. In order to establish a valid STAR trust, care and attention is essential when drafting its purposes.
When the STAR Law was first introduced there were concerns that the rest of the world simply would not recognise the validity of STAR trusts. Thankfully, that concern has not materialised. In fact, there are no known cases challenging the validity of STAR trusts elsewhere in the world.
In countries which have adopted the Hague Convention on the Law Applicable to Trusts and On Their Recognition (including the United Kingdom, which enacted the Recognition of Trusts Act 1987), there is little doubt that a STAR trust would be classified as a 'trust' under the convention, and a trust governed by Cayman Islands law.
For further information on this topic please contact Anthony Partridge, Giorgio Subiotto or Fraser Allister at Ogier by telephone (+1 345 949 9876) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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