STAR trusts: A world class structuring vehicle?

In this two part article we explore three of the objections that have been raised in respect of STAR Trusts, and explain why they need not concern practitioners. In this part we will explore how a Cayman Islands STAR trust might be treated by a foreign court and we look at some common-place, practical, solutions to get around the issues identified. 

In part 2, appearing next quarter, we look at what happens with a STAR trust if the enforcer is unwilling to act, and we address the question of the STAR trust’s “portability” between jurisdictions.

These papers are written in the hope that a greater understanding of the workings of STAR trusts will allow more overseas practitioners to join the growing ranks of STAR trust advocates around the globe, and allow them to conclude that STAR trusts are a world class structuring vehicle.

STAR trusts – the background

The Cayman Islands introduced the Special Trusts (Alternative Regime) Law1 (the STAR Law) in 1997. Revolutionary at the time, the STAR Law has since been emulated by a number of jurisdictions. Prior to the STAR Law, statutory regimes for the establishment of non-charitable purpose trusts did exist elsewhere. Those regimes were characterised by the introduction of a general (statutory) amendment to the “ordinary” trust regime of those jurisdictions2, rather than the creation of a parallel regime.

The Cayman Islands’ STAR Law introduced an “alternative regime” into which a settlor, or trustee could “opt.” A trust to which the STAR Law applies is referred to as a STAR trust – it is bound by the “alternative regime” rules. All other trusts are referred to as “ordinary” trusts.

The “opt in” approach has several implications. The first is that a settlor wishing to establish an “ordinary” trust in the Cayman Islands can do so, simply by not making a declaration that the trust should be a STAR trust. The second implication is that one cannot inadvertently establish a STAR trust.
A STAR trust can be set up to benefit persons and/or to further purposes. Those purposes can be charitable, non-charitable, or a mixture of both. This offers major benefits and makes the STAR trust a planning vehicle of almost unparalleled flexibility.

The STAR Law ensures that a STAR trust can still be properly enforced by the statutory introduction of the role of “enforcer.” The enforcer has the right, or duty, to “enforce” the STAR trust, and to ensure that the Trustee acts appropriately in the furtherance of the purposes.

Except where it is varied by the STAR Law, the laws applying to a STAR trust are the same as those applying to any Cayman Islands trust3. The impact of this provision is to import hundreds of years of trust-related case law into the STAR Law regime.

STAR trusts are used for a bewildering variety of purposes, which are outside the scope of this paper. Their use covers everything from holding Private Trust Company shares, to holding Management Shares in a mutual fund, to setting up dynastic estate planning structures (partly because a STAR trust is not bound by the perpetuity rules that apply to other types of Cayman Islands trusts4). The list grows with each passing year.

The arguments in respect of the enforceability of a STAR Trust

Since their introduction, over 16 years ago, much has been written about how a STAR trust would be treated outside of the Cayman Islands. Most of this consideration has focused on how a STAR trust might be treated by the courts of England and Wales5. In essence, these papers looked at whether English law would treat a STAR Trust as a valid trust, even though a STAR trust is only a “trust” under Cayman law because of the STAR Law.

The arguments that then follow typically move on to suggest that a STAR Trust, if subjected to judicial scrutiny outside of the Cayman Islands, would be held to be invalid. A number of negative consequences would then necessarily flow from that determination.

However, such analysis is incomplete. As a matter of Cayman Islands law, a STAR trust is inarguably a valid trust: the STAR Law makes it so, creating a form of “statutory trust.” The fact that the STAR trust is valid as a matter of Cayman Islands law then has implications for the treatment of STAR trusts elsewhere in the world.

The position that an English court is highly likely to take in respect of a STAR trust, when applying English law, is made clear because England has ratified, and legislated to introduce into the domestic law, the Hague Convention on the Law Applicable to Trusts and on their Recognition6 (the Convention).

In brief, the Convention provides for the recognition, in all states to which the Convention applies, of structures which are “trust like,” but which would otherwise not qualify as “trusts” under the domestic law of the place which is considering a given arrangement. This means that a STAR trust which was considered by the English courts would (subject to some possible, limited, exceptions which are well-considered in other papers) be treated, for all purposes as (a) a valid trust arrangement, and (b) as being governed by Cayman Islands law.

As at the date of this paper, the U.S. has ratified the Convention7, but it is yet to enter into force there. The Convention is in force in Australia, Canada, Italy, Luxembourg, Malta, Monaco, the Netherlands and Switzerland (plus, of course, the United Kingdom). It is difficult to see how a STAR trust could be considered to be invalid in any of these jurisdictions.

Non-Convention jurisdictions and insulation techniques

Putting aside the Convention, we are left with a large number of jurisdictions in which the Convention does not apply, and which may or may not have their own trust concept in their domestic law. How can STAR trusts be used with confidence in those jurisdictions?

The solution to this problem comes from the use of an underlying Cayman Islands company to hold all of the assets which are introduced into the STAR trust. This is referred to as an “insulation technique.” By employing this simple device, many of the theoretical objections to the use of a STAR trust are resolved.

Before considering this idea more fully, it is worth noting that this approach has been used, successfully, for many years to allow “ordinary” trusts to be used by people from jurisdictions which do not have a trust concept in their domestic law. After all, if a court in, say, Russia, was asked to look at the validity of a foreign trust as a matter of Russian domestic law, it is unlikely to matter whether that trust is a STAR trust, or an “ordinary” trust; both concepts are alien under domestic law and both trusts are therefore potentially invalid under that analysis. The solution comes by changing what the domestic courts are called upon to analyze.

Returning to the use of an underlying company as an effective “insulation technique,” the typical arrangement involves the establishment of a STAR trust, and the incorporation of a Cayman Islands company. All of the issued shares of the Cayman Islands company are held by the trustee of the STAR trust, so that the company is an asset of the STAR trust.

The establishment of the STAR trust and the incorporation of the company are both valid as a matter of Cayman Islands law, as is the transfer of the shares in the company, into the name of the trustee. At this stage, the only jurisdiction that is involved is the Cayman Islands, and no questions of the laws of any other jurisdictions arise. The Cayman Islands Trusts Law (Revised) has a number of further provisions (known as the “firewall provisions”) which are aimed at ensuring that it is the courts of the Cayman Islands that have jurisdiction in respect of a number of key questions arising in relation to a Cayman Islands trust.

The next step is for the assets which are to be held within the STAR trust to be transferred to the company, rather than to the trustee, so that they become indirect trust assets. This simple change of approach has far-reaching implications. To a foreign court examining the transfer, or looking at the nature/validity of the structure, we now have a very different set of considerations. The question for them becomes whether their legal system has any problems with a Cayman Islands company holding assets, or receiving the assets by way of some form of transfer. Trust-related considerations do not come into play.

In the vast majority of cases a transfer to a company does not create a problem. It is almost universally accepted that a company, even a foreign company, has its own legal personality, separate from the person or entity that owns it, and that a company is capable of being the legal holder of assets in its own right.

Whilst a Cayman Islands STAR trust is the legal owner of the company, the fact that the company has its own legal personality typically means that the foreign court will not involve itself in the question of the ownership of the company, in determining whether the company itself is the legal owner of property that was transferred to it.

By the simple expedient of interposing a company in the structure, the legal nature of that structure, to the outside world, is transformed.

Conclusion

Legal systems interact and come into conflict with each other all the time, in an increasingly international world. At the same time, those legal systems adapt and find ways to deal with the vast array of creative legal vehicles which come before them. Just as the common law world is coming to terms with foundations, the civil law world is coming to terms with trusts.

Whilst the STAR trust may seem to differ significantly from an “ordinary” trust to someone with a common law trust background, the differences are almost incomprehensible to someone from a non-trust jurisdiction. Just as the courts in those countries are able to deal with “ordinary” trusts, they would be able to readily deal with STAR trusts. The lack of reported cases, against a backdrop of wide-spread use, already serves as testament to that fact.

For those waiting for affirmative rulings on the acceptability of STAR trusts in any number of foreign jurisdictions, the wait will go on. Practitioners are wise to the potential problems and have already found an effective solution. 

Endnotes:

  1. Now contained in Part VIII of the Trusts Law (2011 Revision)
  2. The BVI is one example, introducing non-charitable purpose trusts by the Trustee (Amendment) Act 1993, itself based on the Bermudian Trusts (Special Provisions) Act 1989; See Legislating on Purpose: a critical evaluation of statutory purpose trusts in the British Virgin Islands, Raymond Davern, Trusts and Trustees, Vol. 17, No. 1 February 2011, pp 34-57;
  3. Section 98 of the Trusts Law (2011 Revision)
  4. Section 13(1) of the Perpetuities Law (1999 Revision)
  5. A number of excellent papers on this topic exist.  Amongst them, the authors recommend (i) Exploding STAR Trusts, Gilead Cooper QC, 3 Stone Buildings (based on notes from a talk and available at http://clients.squareeye.net/uploads/3sb/events/230409_cooper_star.pdf), and (ii) Star trusts, Antony Duckworth, Trusts & Trustees, Vol. 19, No. 2, March 2013, pp. 215–229
  6. The Convention was ratified by the U.K. on November 17 1989, and entered into force on January 1 1992. The Convention was made effective as a matter of U.K. domestic law by virtue of the Recognition of Trusts Act 1987.
  7. On May 13 1988, with no indication as to if/when it might enter into force

 

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Robin Garnham

Robin Garnham is a director/principal of Cayman Fiduciary (CFL), a Cayman Islands based company licensed by the Cayman Islands Monetary Authority. CFL specializes in providing independent fiduciary and corporate services to a restricted group of clients. Robin is a member of the Society of Trust and Estate Practitioners, the Institute of Chartered Secretaries and Administrators and is a member of the Association of Accounting Technicians. Robin has over twenty-three years experience in fiduciary and corporate management obtained from positions held in Jersey, Channel Islands and the Cayman Islands. Prior to relocating to the Cayman Islands Robin was based in Jersey, Channel Islands where he held the position of Senior Trust Officer with Bermuda Trust (Jersey) Limited (which now forms part of the HSBC Group).
 

Robin Garnham
Director/Principal
Cayman Fiduciary Limited
Landmark Square
Cayman Islands

T: +1 (345) 746 3100
E: robin.garnham@cflcayman.com
W: www.cflcayman.com
 

David Cooney

David is a Partner at Charles Russell Speechlys, based in Zurich, where he specialises in International Private Client work, with a focus on private client structures. Before that, David was a Partner at Ogier, where he headed the Private Client and Trusts team in the Cayman Islands. David is an English solicitor and a UK Chartered Tax Advisor, with expertise in the UK taxation of individuals, trusts and estates. David is currently a member of the Society of Trust and Estate Practitioners (STEP), Zurich branch. 

David Cooney
Partner
Charles Russell Speechlys AG
T: Tel: +41 43 430 0200
E: David.Cooney@crsblaw.comW: charlesrussellspeechlys.com/
 

Cayman Fiduciary

Enabling clients to take advantage of the leading offshore jurisdiction in the Caribbean while priding itself on the dleivery of independent fiduciary and corporate services. that independence is achieved by there being no link to any bank, investment manager, law firm, accounting firm or other service provider.  Cayman fiduciary provides tailored solutions to specific needs. these solutions are determined by working closely with key adevisers who may be introduced by the client or sourced from its own extensive contacts which reside in numerous countries. It prides itself on its ability to achieve a high level of client satisfaction in all services it offers and welcomes new clients who seek that level of commitment and professionalism. 

 

Cayman Fiduciary Limited
Landmark Square
Cayman Islands

T: +1 (345) 746 3100
E: robin.garnham@cflcayman.com
W: www.cflcayman.com

 

Charles Russell Speechlys

Charles Russell Speechlys is a law firm with broad experience. CRS head office is in London, UK.Tel: +44 (0)20 7203 5000 W: www.charlesrussellspeechlys.comHead office: 5 Fleet Place, London, EC4M 7RD, UK Other offices: Cheltenham, UK Guildford, UK Doha, Qatar Geneva, Switzerland Luxembourg Manama, Bahrain Paris, France Zurich, Switzerland