What other comparable legislation exists within the industry?
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 2007 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. This in part may be because many foreign advisers do not fully appreciate the potential benefits and flexibility that the STAR Law can offer.
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, or is perhaps not capable of managing due to the specific business involved. There is an identified demand for a vehicle which allows the flexibility of inclusion of such share ownership into planned structures without exposing any of the parties to potential liability. 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, hence the reason why fees are often substantially greater within discretionary trusts.
- 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. An Enforcer can be an individual or corporate body who either acts in an independent professional capacity or in a personal capacity. That Enforcer will have access to all trust documents and may have prior knowledge of the parties and interests concerned. The trust document will define how an Enforcer is to be appointed and replaced in light of the statutory requirement to have one or more Enforcers consistently in office.
- The STAR Law also 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 as opposed to encouraging those who have differences of opinion to discuss them in a controlled forum.
- The law against perpetuities need have no application and therefore these trusts are not necessarily subject to any time constraint. 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. It also has additional depth where use of the traditional legislation does not satisfy the specific requirements.
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. These scenarios result from the desire to implement sound tax planning and to have the beneficial ownership removed from the assets involved.
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 dearth of case law that has molded the traditional trust, this should be interpreted as a positive reinforcement of the careful drafting and stability of the STAR Law. The STAR Law has been in place for approximately 12 years and the fact that no cases have had to be decided by the courts 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. That said, it should also be noted that it is common for litigation to occur after the death of the Settlor. Accordingly, the relative infancy of the legislation could indicate that some tests of the legislation may be in front of us.
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. The option of decanting the assets to a third party trust could be considered. Care must be taken to ensure no negative tax implications are experienced if this route is investigated.
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. Consideration must also be given to whether the change is being driven by dissatisfaction with the jurisdiction or the individual service provider. If the move is driven by a clash of personalities with the service provider, disappointment regarding certain performance or activity, or a change in key personnel, it may be that the answer is a change in service provider as opposed to a change in jurisdiction.
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. As regards the promotion of STAR, it is already very popular and well recognised as evidenced by the stated indicative percentage of all Cayman trusts created that are STAR trusts. It is down to the Cayman fiduciary professionals to promote its use and to make all advisers aware of the level of quality that exists within this piece of legislation in the Cayman Islands.