STAR Trusts: A world class structuring vehicle?

In this, the second part of a two part article, we continue to explore the objections that have been raised in respect of STAR Trusts, and explain why they need not concern practitioners. In the first part we looked at how a Cayman Islands STAR trust might be treated by a foreign court.

In this part we briefly consider: 

  • what happens if the enforcer is unwilling to act;
  • how the STAR Law ensures that there is always an enforcer;
  • the rights of beneficiaries under a STAR trust;
  • enforcer succession;
  • enforcer committees; and
  • the STAR trust’s “portability” between jurisdictions.

The enforcer

A STAR trust needs an enforcer. An enforcer has “standing to enforce a [STAR] Trust”1. The term “standing to enforce” means having a “right or duty to bring an action for the enforcement of the [STAR] Trust.”2 In acting as enforcer, and subject to any provisions of the trust deed to the contrary, the enforcer has the same rights as a beneficiary of a non-STAR trust to make applications to court, and to receive information about the trust.

The enforcer is essential to a STAR trust because a beneficiary of a STAR trust does not, as such, have standing to enforce the trust, or an enforceable right against a trustee or an enforcer, or an enforceable right to trust property3. Without an enforcer, a STAR trust cannot function and so a reasonable concern is how to deal with an uncooperative, unfit or absent, enforcer. This potential problem is comprehensively addressed by the STAR Law, and is usually further considered in a well drafted STAR trust.

How does the STAR Law ensure that there is always an enforcer?

The STAR Law empowers a trustee, or an enforcer, to apply to the court to appoint an enforcer if certain circumstances exist4. There are three situations in which the trustee or enforcer is able to make this application.

The first case is where the terms of the trust require the appointment of an enforcer but it is either (i) impossible to make the appointment without the court’s assistance5, or (ii) it is “difficult or inexpedient”6 to make the appointment without the court’s assistance.

The second case is where the STAR trust has an enforcer with a duty (rather than just a right) to enforce the trust, but where that enforcer is “unable, unwilling or unfit” to do so7.

These first two cases give the trustee (or an enforcer) the power to apply to court, but do not impose an obligation on anyone to do so. However, the trustee has a fiduciary duty to act responsibly with a view to the proper execution of the trust and so in discharging this duty may be compelled to exercise these powers in certain circumstances. The fact that the trustee must be (or include) a Cayman Islands licensed trust corporation also significantly increases the chances that the trustee will be mindful of these duties and will act appropriately.

The final case is where there is no enforcer who is of full capacity and who is either (i) a beneficiary8, or (ii) has a duty to enforce and is fit and willing to do so9. The STAR Law then goes further, imposing a positive obligation on the trustee to apply to court (within thirty days) for the appointment of an enforcer (or for the administration of the STAR trust under the direction of the court) where no enforcer meeting the requirements of this provision is otherwise appointed. A trustee who fails to take this action is guilty of an offence10.

This last provision ensures that the trustee is always going to be subject to an obligation to ensure that the STAR Trust has someone to act as an enforcer. Even where there is an enforcer in place, if the trustee determines that the enforcer is not “fit and willing” to enforce the STAR Trust, they have an obligation to apply to court within thirty days.

What can the beneficiaries do if the enforcer won’t act?

If an enforcer refuses to act, or is “unwilling” or “unfit” to act, what can the beneficiaries do? In some cases there is nothing they can do directly. This is not a failing of the STAR Law, but an important part of it. The regime was designed for the purpose of allowing benefit and enforcement rights to be addressed separately. A beneficiary of a STAR trust can be appointed as enforcer. In those cases a beneficiary has the same rights as any other enforcer, considered above.

If one or more of the beneficiaries is not appointed as an enforcer, the STAR Law respects that decision. That beneficiary does not have any rights to enforce the STAR trust, does not have an enforceable right against a trustee or against an enforcer, and does not have an enforceable right to trust property. To cite this as a criticism of the STAR Law is misguided; this is what the STAR Law set out to achieve and whilst it is no doubt frustrating for a beneficiary who finds himself in that position, this feature of the STAR Law is a significant attraction for settlors, worried about disputes within their families.

A beneficiary who is not an enforcer has the option of encouraging the trustee (or another enforcer) to take action against an unwilling or unfit enforcer11. It would be difficult, if not impossible, for a beneficiary in this situation to take matters further than that, as the STAR Law specifically provides that such a beneficiary does not have enforceable rights in respect of the STAR trust.

Generally speaking, a trustee has a duty to enforce the obligations of other fiduciaries. This would include a duty to enforce the obligations of a fiduciary enforcer12. Likewise, a new fiduciary enforcer has an obligation to consider the actions of a former fiduciary enforcer, and a new trustee has an obligation to consider the actions of a former trustee, and of a former fiduciary enforcer. Consequently, in most STAR trusts there is a complex network of obligations requiring one party to police the actions of another. Whilst beneficiaries may not have direct rights of enforcement, they will often be able to gain some traction by putting pressure on the various parties to enforce the obligations of others.

Avoiding problems before they are encountered

The enforcer of a STAR trust does not have to be a licensed trust company. In fact, there is no regulation around who can be an enforcer of a STAR Trust. When problems with enforcers arise it is often because the enforcer does not fully understand the role that they have been asked to take on, or otherwise fail to engage with that role. In other cases an enforcer is a family member who becomes involved in a family dispute and seeks an advantage by abusing their role as enforcer.

One of the simplest ways to avoid problems with enforcers involves careful selection at the outset.  By using a professional enforcer, or enforcer company, the likelihood is that their obligations will be discharged diligently and efficiently. In most cases, Cayman Islands companies who offer enforcer services will be regulated by the Cayman Islands Monetary Authority in respect of the provision of some other services (such as trusteeships, or directorships).

In some cases, the terms of the trust deed help to avoid any problems with the enforcement of a STAR trust. There are a number of simple, but effective, provisions which are often seen in STAR trusts. One option is to allow an enforcer to appoint (usually by deed) a person to succeed him in that role. If the initial choice of enforcer is effective, there is a good chance that the enforcer will use the same good judgment in deciding who should succeed him in that role.

Another option is to provide for someone else to have a power to remove and replace enforcers.  Subject to any tax considerations, this will often be the settlor, a protector, or some other power holder who is given that power within the trust deed.

Finally, many STAR trusts utilize an enforcer committee, whereby several enforcers are appointed. The trust deed will then provide a mechanism for how an enforcer committee makes decisions. This will sometimes be by simple majority vote and sometimes on a unanimous basis. It is not uncommon to see provisions to allow the enforcer committee to remove one or more of its members, in certain situations.

Portability

STAR trusts are unique to the Cayman Islands, so it follows that a STAR trust cannot simply be moved to another jurisdiction. Whilst sometimes cited as a criticism of STAR trusts we will explain how most STAR trusts are fully “portable”.

Fundamentally, most STAR trusts are non-charitable purpose trusts, and a growing number of trust jurisdictions have legislated to introduce such trusts. For this reason a STAR trust can usually be exported, with some amendment to its terms.

There are several ways to export a STAR trust. The first is where the trust deed contains a provision allowing the proper law of the trust to be changed to that of some other jurisdiction. In a well-drafted STAR trust, that clause will then go on to empower the trustee to make whatever “consequential alterations or additions they consider necessary or desirable” to ensure that the trust remains enforceable under the law of the new jurisdiction.

If the trust in question lacks a specific power to change the proper law that does not necessarily mean that the STAR trust needs to remain in the Cayman Islands. In many cases, the STAR trust will contain widely drafted powers of appointment and/or powers of advancement, which can be used to amend the terms of the STAR trust, such that (i) the proper law of the trust is changed to that of some other jurisdiction, and (ii) any other changes needed for the trust to operate within the new jurisdiction are also introduced.

It follows from the above that it is also possible to import a foreign trust into the Cayman Islands, and to provide for it to become a STAR trust. This is done by following the reverse of the above process: a power of amendment, appointment, or advancement in the foreign trust is exercised to change the proper law of the trust to that of the Cayman Islands, and to make whatever other changes are required in order to bring the trust within the STAR trust regime.

In many cases a decision to transfer a trust out of one jurisdiction and into another is taken as a result of a breakdown in relationship with a service provider (such as a trustee). It is rarely the case that the jurisdiction is unable to meet the needs of a given client. Before making the decision to “export” a STAR trust it is often sensible to consider whether the client’s needs can still be met within the Cayman Islands, and whether a change of service providers will be sufficient.

In other cases, a decision to export is taken due to a desire to administer the trust from a time zone that is more convenient to the settlor, the family office, or someone else connected to the structure. Whilst the STAR Law imposes a requirement for the trustees of a STAR trust to be, or include, a Cayman Islands licensed trust corporation, there is no obligation for the administration to take place within the Cayman Islands. In many cases STAR trusts are administered from other jurisdictions around the world, either through the overseas offices of the Cayman Islands trust corporation, or via some form of delegated administration agreement.

Conclusions

It will always be the case that someone is in a position to hold a fiduciary enforcer to account. Problems with enforcement of a STAR trust are rare but the risks can be reduced still further by an appreciation of the importance of an enforcer, and by proper selection of all fiduciaries connected to a trust.

Whilst sometimes cited as a criticism of STAR trusts, the ability to remove the rights of beneficiaries to enforce the trust, and to obtain information in respect of it, is one of the reasons for its success.

It is also the case that STAR trusts can usually be “imported” and “exported” without any difficulty, provided that the trust deed was drafted with that in mind. If a settlor wants to prevent this from happening, that can be provided for in the trust deed.

Over the course of these two papers we hope that we have been able to dispel some of the common misunderstandings in respect of STAR trusts, and to explain how they truly are a world class structuring vehicle. 

Endnotes 

  1. 1 Section 95(1) of the Trusts Law (2011 Revision)
  2. Ibid.
  3. Ibid, at section 100(1)
  4. Ibid, at section 100(4)
  5. Ibid, at section 100(4)(a)(i)
  6. Ibid, at section 100(4)(a)(ii)
  7. Ibid, at section 100(4)(b)
  8. Ibid, at section 100(4)(c)(i)
  9. Ibid, at section 100(4)(c)(ii)
  10. Ibid, at section 100(5)
  11. by reminding them of their duties under sections 100(4) and 100(5) of the Trusts Law
  12. Section 100(3) of the Trusts Law gives a trustee, or another enforcer (or any person expressly authorised by the trust deed) standing to bring an action for the enforcement of the duty (if any) of an enforcer.

 

Star-Trust_Cayman
SHARE
Previous articleStAR, asset recovery and the global toolbox against corruption
Next articleQuarterly Review
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