Philanthrocapitalism and STAR trusts – the latest in philanthropic trends

Read our article in the Cayman Financial Review Magazine, eversion

 The
rise in philanthropy
 

True philanthropy is not to be confused
with charity. Philanthropy has been described as the pursuit of excellence in
every facet of human life for every human life, by imagining and developing new
ideas, which bring that philosophy to life and allow it to continue living.
Ironically, the concept of philanthropic giving may, in some cases make its
benefactor more wealthy, if he or she so wishes, thus distinguishing
philanthropy, which may or may not yield a profit, from purely charitable
activities which are strictly not-for-profit.  

The idea of philanthropy was originally
developed by individual donors. Notable examples in the early 20th Century were
Andrew Carnegie and John D. Rockefeller. Typically a group of friends or
business associates would pool their funds and decide how to use the money to
benefit the causes they cared about most.

The re-emergence of philanthropy in
recent years has been led by notable individuals such as Bill Gates and Warren
Buffett, who have applied the techniques of business to philanthropy,
introducing the concept of ‘philanthrocapitalism’. This trend has increasingly
led philanthropists world-wide to search for suitable vehicles, such as trusts,
to help sustain and develop the cause and grow the revenue with the aim of
continued giving.  

Sir Stuart Reed, entrepreneur and founder
of a recruitment business with a turn over of £750 million a year is quoted as
saying:

“Without charity what’s the point of business? And without business
there would be no charity.” He recently coined the phrase “financial obesity is
ugly”: “There are about 3,400 mass-affluent individuals in the UK – those with
more than £20m in personal wealth. We need public pressure on these people to
donate to charity. We tend to admire the guy with the new BMW, yacht or private
aeroplane. The social pressure is on these people to show off by buying toys.
We need more public pressure that encourages them that financial obesity is
ugly”1.

Campaigns such as this
which promote and advocate working for mankind and not just for the company
have contributed to the latest philanthropic trend of giving: ‘the gift that
keeps on giving’. 

STAR
trusts and philanthropy
 

 Why
a STAR trust?
 

Due to the growing
philanthropic trends that are re-emerging and the rise of the new concept of
philanthrocapitalism, many modern philanthropists seek to establish vehicles
that provide flexibility and are capable of being administered efficiently in a
tax neutral environment. One of the advantages of STAR trusts formed in the
Cayman Islands is that no direct taxes arise. 
 

Many of the
advantages that are unique to STAR trusts are embedded in their key features.
The flexibility of STAR trusts originates in the fact that the objects of a
STAR trust are not required to be purely charitable. Traditionally, charitable
purposes fell under the Statute of Elizabeth2, which
were later identified by Lord Macnaghten as the four heads of charity: the
relief of poverty, the advancement of religion, the advancement of education
and other purposes beneficial to the community which do not specifically fall
under the aforementioned3. The
objects of a STAR trust may be charitable, partly charitable or non-charitable,
giving rise to broad applications and flexibility. With the growing trend
towards combining philanthropic giving with a viable operating business, a STAR
trust is ideal as it can be established for purposes that are partly
not-for-profit and partly revenue generating. 

Role
of the enforcer
 

The Trusts Law makes
a distinction between an enforcer of the STAR trust and a beneficiary,
demarcating a clear line between the right to benefit from and the obligation
to enforce a STAR trust. This effectively removes the beneficiaries’ right to
enforce the trust and the beneficiaries’ general entitlement to disclosure of
information, thereby reducing the potential for claims by beneficiaries which
is not likely to be desirable for philanthropic structures. Generally, the
right to enforce the STAR trust does not rest with the beneficiary unless the
beneficiary is also the enforcer. 

An enforcer
committee could potentially be established to act as the enforcer of the STAR
trust comprising members connected with the philanthropic endeavour. This would
allow committee members that are directly involved in the philanthropic mission
to participate collectively in the proper execution of the benevolent purpose
of the trust. Alternatively, the committee could be made up of individuals with
special expertise in relation to the philanthropic venture or a group of
trusted individuals capable of carrying out a number of functions complimenting
the overall structure. The committee may serve in an advisory or authoritative role. 

Whereas an
uncertainty as to objects, mode of execution or administration might otherwise
render a non-STAR trust void, the possibility exists of an application to the
court, made by the trustee on a ‘cy-près’ basis, which provides the flexibility
that a STAR trust can be reformed by the court in accordance with the settlor’s
general intent. The purpose of such an application would be to vary the trust
such that the purposes are carried out in accordance with the general intent of
the settlor. The application of the doctrine of cy-près would be approved by
the court in very limited circumstances. This feature provides additional
comfort to the settlor, providing security that the STAR trust would not fail
and the philanthropic endeavour would continue as intended.  

In addition, the
terms of a STAR trust may grant the power to the trustee or any other person to
resolve uncertainty of objects or the mode of execution. Again, where any
uncertainty cannot be resolved by the trustee or the nominated individual,
ultimate recourse lies with the court. The settlor philanthropist may be given
the power to reform the objects of the STAR trust, thereby allowing future
modification of the purposes and objectives of the STAR trust.  

In the Cayman
Islands the trustee of a STAR trust must be, or must include, a trust company licensed
to conduct business in the Cayman Islands. This should provide a level of
comfort to philanthropists using Cayman Islands STAR trusts as other similar
jurisdictions do not have such requirements for purpose trusts. It should also
be noted that a Cayman Islands private trust company may act as the trustee of
a STAR trust. 

Usefully, the trustee of a STAR trust may
act as the sole shareholder of a PTC which acts as the trustee of the
underlying related trusts. Typically, each trust is a PTC structure and will
hold different classes of assets and one or more trusts may be established for
different philanthropic purposes. The philanthropic ventures of the underlying
STAR trust or trusts could be managed and controlled at board level by the
directors of the PTC. 

The rule against
perpetuities does not apply to STAR trusts. Therefore, the unlimited duration
of STAR trusts eliminates the risk of a resulting trust in favour of the
settlor at the end of the perpetuity period which might attract tax penalties.
This is a further advantage of a STAR trust structure ensuring that the
altruistic intentions of the settlor will continue indefinitely or as defined
by the trust deed. 

Though a STAR trust
may not hold land in the Cayman Islands, this does not preclude the trustee
from holding an interest in a company, partnership or other entity which may.
Consequently, organisations such as the National Trust or similar land
preservation organisations which wish to preserve important landmarks for
either historical or environmental value may not be precluded from using STAR
trusts, if they do not wish to establish a purely charitable structure by other
means. 

One of the many
advantages of establishing STAR trusts for philanthropic purposes is that there
is no difficulty in combining philanthropic objects with family or business
objects. For example, a settlor may wish family members to play a part in the
administration of the philanthropic structure. Another settlor may feel that in
some parts of the world commerce is more beneficial than generosity, so he may
establish a STAR trust to provide finance on a for-profit basis for businesses
in undeveloped regions in the hope that the trust activities will generate a
profit, so as to maintain or enlarge the fund devoted to the philanthropic
purpose, and perhaps to provide some benefits for his family. In short, the
STAR trust regime provides the philanthropist great latitude to determine how
the settled funds are to be used. 

The use of STAR trusts for humanitarian purposes continues to grow in
popularity and moves in tandem with the growing trend in philanthrocapitalism.
With a versatile structure and reduction of potential claims, access to the
court to ensure that the STAR trust will not fail and favourable tax
considerations, the applications and uses of STAR trusts for philanthropic
purposes knows few boundaries. 

 

  

               

   

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Carlos de Serpa Pimentel
Carlos de Serpa Pimentel currently serves as Chairman of STEP Cayman Islands, having served as Secretary from 2006-2009.  He has been a member of STEP for over ten years and is a Partner and Private Client and Trusts Practice Group Head at Appleby in Cayman.
 
Carlos de Serpa Pimentel
Partner, Cayman Practice Group Head
Private Client & Trusts
Appleby
Clifton House 75 Fort Street
PO Box 190
Grand Cayman KY1-1104
Cayman Islands

T. +1 (345) 814 2082
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Orchid Morrison

Orchid is an associate in the Private Client and Trusts Practice Group. She practises in the area of non-contentious trusts and specialises in the formation, variation and termination of purpose and person trusts, including fixed trusts, discretionary trusts, trust declarations, charitable and STAR trusts.

Orchid Morrison
Legal Counsel
HSBC Securities
68 West Bay Rd
Grand Cayman, KY1-1102
Cayman Islands

T: +1 345 914 7516
W: hsbc.com

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