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Cayman Islands STAR Trust
A Cayman Islands STAR Trust is short for the Special Trusts Alternative Regime Law of 1997 which incorporated into the Trusts Law in 2011 and revised in 2013 and 2016. The STAR Trust is unique statutory trust established for persons and/or purposes (including non-charitable). A trust instrument must clearly establish that the STAR law will apply to the trust.
While all other trusts in the Cayman Islands have a lifespan up to 150 years, a STAR Trust can have a perpetual, indefinite lifetime. Another feature is the unique role of an appointed “Enforcer” who enforces the STAR Trust with greater powers than the trustee(s).
In regards to trustees, a STAR Trust must have as its only trustee or amongst other appointed group of trustees, a licensed Cayman Islands Trust Corporation.
Uses of a STAR Trust
The uniqueness of a STAR Trust is demonstrated by the additional uses from traditional trusts such as:
• Dynasty Trusts – Unlike all other trusts limited to a maximum lifespan of 150 years, this trust can have perpetual life. In essence, a family can establish a “dynasty” where never ending generations of a family can enjoy the benefits of one trust.
• Trustee of a Private Trust Company – This type of trust can be the center of numerous worldwide trusts in different countries. The trust holds the shares in a Cayman Islands Private Trust Company (“PTC”) ensuring the PTC carries out its function as the trustee for all the other trusts. As owner of the PTC, this type of trust guarantees total control of all the trustees including succession of trustees if any retire or become deceased.
• Controlling a Family Business – This type of trust ensures that the family business is not interrupted by the death of the settlor by holding all the family company’s shares. This allows the current company directors and managers to continue running the family company.
• Limiting Beneficiaries Rights – This type of trust can limit or restrict the ability of the beneficiaries to access information regarding the trust or ability to enforce the trust. Trust laws and court cases have made it clear that beneficiaries of typical trusts have the right to access all trust information. Such rights can be limited or completely eliminated based on the wording of the trust instrument. Total control will be maintained by the Enforcer. The reason for these restrictions is that many beneficiaries filed lawsuits all over the world challenging their trusts. Many times these lawsuits were legal maneuvers to gain greater access to the trust assets than what was provided by the settlor.
• Special Purpose Vehicle – This form of trust can use a SPV in structuring financing and in unique transactions. For instance, “off balance sheet” or entities facing bankruptcy can be separated from the other assets so to be unconnected with the original parties.
• Asset Protection – This is the challenge of this type of trust and why experts favor other jurisdictions, such as the Cook Islands or Nevis. The Cayman Islands discourages fraudulent conveyance. In Cayman terms, fraudulent disposition, otherwise known as fraudulent transfer. This is a civil (not criminal) matter when a debtor attempts to move beyond the reach of a creditor. The Cayman Islands enacted the Fraudulent Dispositions Law in 1989. This law stated that the courts could void property transfer into a vehicle such as a trust. That is, when done with the intent to keep assets away from current or known future creditors. The creditor has the burden of proof. The statute of limitations on fraudulent conveyance, in regards to the applicable transfer, is six years under this statute.
This timeline in the Caymans is much longer than more favorable jurisdictions such Cook Islands and Nevis. These jurisdictions possess a much shorter deadline of one to two years after creating and funding their trusts. After such time, the courts will reject fraudulent transfer claims. Notably, even if a claim is brought within the requisite time in these regions, the legal barriers are nearly insurmountable.
A Cayman Islands STAR Trust can enjoy these benefits:
• Complete Foreign Ownership: Foreigners can form trusts and have foreigners as the only beneficiaries.
• Total Control: STAR Trusts allow the settlor the option to maintain control over the trustee, limit the rights of the beneficiaries, and control all companies whose shares are held by the trust.
• Privacy: Since trusts do not register with the government, all their information remains private.
• No Taxes: The Cayman Islands do not impose any taxes on trusts. Note: beneficiaries who are U.S. taxpayers and others in countries taxing global income must declare all income to their governments.
• Perpetual: The trust can have an indefinite lifespan.
• English: English is the primary language in the Caymans.
Cayman Islands STAR Trust Name
The trust must use the word “Trust” in its name.
The trust’s name cannot resemble any other trust’s name on the islands.
There is no requirement for the registration of a trust with the government.
The trust services company prepares all the documents forming a trust including the Trust Deed which will contain:
• Name of the trust;
• Trust terms;
• Trustee’s name and Enforcer’s name;
• Beneficiaries’ names;
• Settlor’s name;
• Description of all assets transferred to the trust;
• Distributions of profits and assets;
• Duration of lifespan; and
• Manner of managing the assets and distributions and all other important terms and conditions.
The trustee normally keeps the Trust Deed in his/her Cayman Islands office.
The person creating a trust is called the “settlor” who can be a national of and reside in any country. This kind of trust allows a settlor flexibility with establishing its purpose, the powers of the beneficiaries, trustees, and enforcer. The settlor transfers assets to the trustees on behalf of the trust.
The most difficult part of creating a STAR Trust is the drafting of the wording of its purpose. Clear specific wording will direct the trustees, Enforcer, beneficiaries, the Cayman Islands government and courts, and third parties regarding the settlor’s wishes.
Under the law, at least one of the trustees (or the sole trustee) must be a licensed (or private) Cayman Islands Trust Company.
A Private Trust Company (PTC) is registered with the government to act as a trustee for private clients and not for the pubic to hire its services. The settlor can establish a PTC to act as the sole trustee for his/her trusts in the Caymans and/or in other jurisdictions.
Typically, trustees must take an active role in protecting the trust assets and investments under what is known in English common law as the “Prudent Man Rule”. This law has been enforced in the United Kingdom, the United States, Canada, and other former British colonies and territories.
A STAR Trust can limit the powers of the trustees allowing the settlor or an appointed Enforcer to control how the assets are managed and make investment decisions. In addition, family businesses and other companies owned by the settlor can remain under the control and management of the current directors and officers after their shares are transferred to the trust.
The persons who benefit from the trust’s assets are the beneficiaries. This type of trust is unique in that it is the only type which can limited, restrict, and even prevent the beneficiaries from accessing information or enforcing the trust. Such harsh conditions became necessary when beneficiaries around the world initiated lawsuits demanding the trust be enforced to give them greater access to the assets or other powers not specified in typical trusts. This trust can enforce the wishes of the settlor throughout the indefinite life of the trust without interference from current or future beneficiaries.
Upon the death of beneficiaries, trust normally name their heirs as their replacements which can go on for endless generations in this type of trust.
Typical trusts allow for the appointment of a “Protector” to oversee the trustees. Normally, the trustee must obtain permission from the Protector to distribute or sell assets or to make additional investments, replace and appoint new trustees, etc.
The STAR Trust has an “Enforcer” with greater powers than a Protector. The Enforcer actually takes control of the trust and acts as a typical trustee without needing approval from anyone. Normally, the settlor appoints a trusted advisor or friend as the Enforcer in the trust instrument.
The settlor has the option to reserve specific powers for him/herself while not appointing an Enforcer. All of the powers for a typical trustee can be reserved by the settlor. However, establishing a trust with all powers in the hands of the settlor may be considered a “sham” opening the doors for lawsuits seeking to invalidate the entire trust. However, the Cayman Islands STAR Trust law allows these powers to be reserved with the settlor. Since jurisdiction over all assets held by the trust can be specifically declared to be the Cayman Islands, the Cayman courts will probably uphold the validity of the trust.
Private Trust Companies (PTC)
Cayman laws allow the establishment of a PTC to act as the trustee for a family’s trusts. To qualify, a PTC can only provide private “connected trust services” and register with the Cayman Islands Monetary Authority (CIMA) which is a government regulatory agency overseeing the financial services industry. The PTC is exempt from normal licensing requirements which trust companies must abide. A “restricted” license, as opposed to a “full” license, may be obtained from CIMA which is desirable.
The settlor may establish a PTC to be the sole trustee for the STAR Trust and all other trusts worldwide. Thus, the settlor and his/her successors can control all the trustees. The PTC not only provides all decision making for the trusts, but ensures confidentiality of all trust activities which remain in the family’s control.
Typical Cayman trusts have a law avoiding the English common law’s “Rule Against Perpetuities” which invalidates trusts with no lifespan limits. All trusts other than a STAR have a 150 year lifetime limit. The STAR has a perpetual (indefinite) lifespan.
The Cayman Islands do not impose any taxes on their trusts. However, beneficiaries residing in the U.S. and countries taxing world income must declare all income to their governments.
Since STAR Trusts do not have to register with the government, there are no public records regarding the trust.
Time to Form a Trust
Since no government registration is required, a trust can be formed in one day depending on how fast the trust services company can prepare the documents.
A Cayman Islands STAR Trust can enjoy these benefits: total foreign ownership and control, full privacy, no taxes, perpetual life, and English is the primary language.