The author of this article sets out the case for a particular kind of trust, and foundation company that is a common offering of the Cayman Islands.

The world of international centres has its mind-boggling collection of acronym entities to describe trusts and other structures. One catchy-sounding one is the STAR Trust, associated with the Cayman Islands. How do they work and what are they best suited for? To answer that is Donna Brehaut, associate director at Saffery Champness Registered Fiduciaries on Cayman STAR Trusts. The editors are pleased to share these views; the usual editorial disclaimers apply. To jump into the debate, email tom.burroughes@wealthbriefing.com

For generations, high net worth individuals have chosen the Cayman Islands as the jurisdiction within which to establish a trust. The paradisiacal islands in the azure waters of the Western Caribbean have a well-developed legal system, a strong financial services sector and a stable and business-oriented government. 

Furthermore, the Cayman Islands offer flexibility in the types of trust a settlor is able to establish. One such trust – and one of the biggest advantages to choosing the Cayman Islands as a trust jurisdiction – is the STAR trust and the application of the STAR Trust Law.

The Special Trusts (Alternative Regime) Law, the “STAR” Law, which has been in effect in the Cayman Islands since 1997, allows for the creation of non-charitable purpose trusts and other special trusts and powers under Cayman law. 

STAR trusts have no perpetuity period and can – in theory – exist forever, as they are not subject to the general perpetuity period of 150 years which applies to other non-charitable trusts established in the Cayman Islands.

STAR trusts provide an alternative to the traditional trust structure by offering sophisticated and diverse high net worth individuals and their families a dynamic trust framework enabling a wide range of both charitable and non-charitable purposes. 

Five reasons to choose a STAR trust:

1)    The “Enforcer”…
STAR trusts require the appointment of an enforcer. The enforcer’s duty and right is to ensure that the trust operates in accordance with its stated purposes. The enforcer also facilitates the separation of the right to benefit from the right to enforce the terms of the trust and limits rights to information. 

Only the enforcer (or the court) having the power and duty to enforce the STAR trust means that the beneficiaries enjoy the benefits of the trust fund without the added responsibility of being involved in challenges or disputes with their trustee. 

2)    Looking ahead…
STAR trusts can be very effective for succession planning. The structure of a STAR trust allows the patriarch or matriarch to involve the next generation operationally in a family business, for example, by giving them a platform to become actively involved in the business whilst enjoying the benefits. 
The presence of an enforcer also avoids potential family disputes or disadvantageous influence on the trustee, as the enforcer has overall responsibility for the correct operation of the trust. 

3)    For the philanthropist…
The flexibility of STAR trusts means that they do not need to be created solely for charitable purposes. Consequently, they are an excellent choice in situations where the settlor may wish to include a non-charitable element to the trust or when the purposes of the trust might not be determined wholly charitable under the limited definition given by Cayman law.  

4)    Better together… 
Another of the key advantages of using a STAR trust is the way in which they can work in conjunction with other structures. 
STAR trusts can be established with the sole purpose of holding shares in a Cayman Private Trust Company (PTC) which can provide a level of assurance that the PTC is carrying out its fiduciary duties as a trustee of a trust or series of related trusts. This arrangement would also mean that any succession concerns in relation to the ownership of the PTC are diminished as the STAR trust creates a vehicle through which the PTC shares can be orphaned. 

5)    Not just a trust…
Increasingly, STAR trusts are used as special purpose vehicles (SPVs) in commercial contexts such as in structured finance. A STAR trust can be used to hold shares “off balance sheet” as a STAR trust entity does not have to be connected to the original parties involved in the transaction. 

Whilst there are clearly many benefits to choosing a STAR trust, the Cayman Islands also have another attractive offering to those looking for flexible ways to manage their wealth: the Cayman foundation company. 

Introduced in 2017, the Cayman foundation company is a structure unique to the Cayman Islands which has synergies with a civil law foundation or common law trust whilst allowing the company to retain a separate legal personality and limited liability. 

This makes foundation companies popular asset protection vehicles and often features in succession planning structures for families who are more accustomed to civil law jurisdictions and who therefore might not be as familiar with trusts. 

Furthermore, the beneficiaries of a foundation company are not accountable for the company as duties are owed only to the foundation company and rights are enforceable only against the foundation itself. As the beneficiaries do not have direct rights of action against trustees (as is the case in a traditional trust context), foundation companies are practical structures for holding more complex investments with higher risk attributes. 

Foundation companies can also hold shares in PTCs, be utilised as a Special Purpose Acquisition Company (SPAC) in a commercial context, be created for philanthropic purposes, and act as protector or enforcer of a trust, all of which makes foundation companies extremely flexible and accommodating structures. 

The unique offering of both STAR trusts and foundation companies makes the Cayman Islands an attractive destination for wealth management; families are able to choose a structure which accommodates their specific wealth planning requirements, allowing them the flexibility and robustness they require in their wealth structures.