This Blog was written by: Gosha Sekhon

When I think of the Cayman Islands, I picture sandy beaches, warm temperatures, high-end lifestyles, and since it’s the dead of January, did I mention warm temperatures? More often the Islands are also seen as a tax haven, having never levied income taxes, capital gains taxes or a wealth tax.

What might come to mind less often when thinking of the Cayman Islands are STAR trusts. These are named after the Special Trusts (Alternative Regime) Law 1997 which introduced STAR trusts into Cayman Islands’ law and which are unique to this British Overseas Territory.

A recent note by Tony Pursall, TEP and Richard Grasby, TEP in the November 2016 edition of the STEP Journal highlights a key distinctive feature of STAR trusts. Namely, “any obligation can be imposed on the trustee and effectively annexed to the trust property, by the trust instrument.” The writers astutely observe this leads to a trust deed that is simpler and easier to understand, even for lay persons.

Why were these trusts created at all, however? To address four shortcomings which were seen in existing Islands’ trust law at that time, namely:

1. Philanthropic trusts could only be established for “charitable purposes” as defined by English and Welsh law;
2. The rule against perpetuities prevented trusts from existing for more than 150 years;
3. The beneficiaries could agree to vary the trust (as long as all were sui juris); and
4. A trust could not benefit both a purpose and a person.

Some of the important features of STAR trusts include:

1. A trust can benefit both a purpose and a person.
2. A philanthropic trust does not have to be charitable in purpose.
3. These trusts are less likely to be declared void ab initio because if there is uncertainty as to objects or mode of administration, the trustee or the courts can resolve such ambiguity if necessary.
4. It is required that a trustee(s) for the trust must include a trust company licensed to conduct trust business in the Islands.
5. They may be created for an unlimited amount of time as the rule against perpetuities does not apply.

This then leads to the question, what could these types of trusts be used for? The opportunities are myriad. A few more common ones include:

1. Multi-generational dynasty-style trusts for treasured assets or family businesses.
2. Philanthropic trusts which may not necessarily qualify as “charitable”, for example, trusts to benefit specific social or athletic clubs.
3. Multi-use trusts that can benefit a person and a purpose, such as a family business.

STAR trusts are increasing in popularity with wealthy, private families who have global business interests. For trust practitioners in North America, it will be interesting to see how much their use proliferates for clients here.