CIBC Bank and Trust Company (Cayman) Limited v T&S (unreported, 16 July 2021) was the first decision of the Grand Court dealing with the variation of trusts established under the special trusts alternative regime (STAR).
A "STAR trust" is a form of statutory trust that was introduced into Cayman Islands law to overcome some of the difficulties arising from the use of more conventional offshore trusts (for further details please see "Structuring from the foundations to the stars: Cayman foundation companies and STAR trusts"). For example, unlike conventional trusts, STAR trusts can be established without a perpetuity period and for the benefit of persons, purposes or both. The purposes can be of any kind or number and do not have to be charitable (provided that they are not contrary to public policy or illegal). Therefore, it is the enforcers of a STAR trust (or the court), not the beneficiaries (if there are any), that have the power or duty to enforce the STAR trust, thereby separating enjoying the benefit of the trust's assets and the trust's enforcement.
A significant way in which STAR trusts differ from ordinary trusts, and particularly important in CIBC, is the disapplication of the court's jurisdiction under section 72 of the Trusts Act (as revised); in ordinary trusts, section 72 permits the court to consent to variations of trusts on behalf of certain categories of beneficiaries. In STAR trusts, the relevant power to effect changes is contained in section 104 of the Trusts Act.
If over time the execution of a STAR trust in accordance with its terms becomes "impossible or impractical, unlawful or contrary to public policy or obsolete, in that by reason of changed circumstances, it fails to achieve the general intent of the special trust", the trustee must, unless the trust is reformed pursuant to its own terms, apply to the court to reform the trust using the cy-pres doctrine. If the trust cannot be reformed consistently with the general intent of the trust, the trustee must dispose of the trust property as though the trust has failed.
In CIBC, the trustee of the STAR trusts in question (the trustee and the trusts, respectively) applied to the court to reform the trusts through cy-pres, pursuant to section 104 of the Trusts Act, on the basis that the trusts' execution had become obsolete(1) as a result of the primary beneficiary's decision to relocate to a different tax jurisdiction. There was evidence that this change of residence had been unforeseen by the settlor at the time that the trusts were settled and that it would have had punitive tax consequences, wholly contrary to the settlor's intentions.
The term "obsolete" is not defined in the Trusts Act and it has not been considered in previously reported case law in the Cayman Islands. Having considered the context of the word in this particular legislation, and other contexts, the Grand Court provided the following guidance as to the meaning of the concept in the context of reformation under section 104 of the Trusts Act:
- obsolescence must be by reason of changed circumstances;
- it is the trust's execution that must have become obsolete, rather than the trust itself;
- the language "fails to achieve the general intent of the special trust" means that the trust's execution in accordance with its terms can no longer achieve the settlor's original intention in the changed circumstances, rather than needing to show that the execution has become impossible or redundant; and
- section 104 requires, by the expression "is or becomes" obsolete, that the change of circumstances affecting the trust's execution has already come into existence prior to the application being made; it does not extend to a possible future change of circumstances that has not yet occurred.
The Grand Court found that section 104 of the Trusts Act does not require the court to identify a specific intent that can no longer be achieved. Rather, the question is whether the execution of a STAR trust fails to achieve the trust's "general intent"; even where the "purposes" of the STAR trust can still be achieved, that does not necessarily mean that the "general intent" can be achieved.(2)
In this case, the Court accepted that the general intent of the trusts in question had included an intent to "provide for the beneficiaries in a tax efficient way in a politically stable environment that adhered to the rule of law", and while this general intent had been achieved while the trusts were located in the Cayman Islands, and the primary beneficiary resided where he had at the time of the trusts' formation, this would not be achieved upon the primary beneficiary's relocation, unless the trust deeds were reformed.
While the beneficiary's relocation had not yet happened at the date of the application, the fact that the beneficiary had already resolved to move and had communicated this intention to the trustee was itself the change of circumstances that triggered the ability to apply to the Court for reformation.
Having decided that the STAR trusts could be "reformed consistently with the general intent of the trust", the STAR trust regime dictated that such reform should be made through cy-pres. The term "cy-pres" is from Norman French and is conventionally understood in the context of the reform of gifts for charitable purposes to mean that the purposes of trust must be followed "as near as possible to" the settlor's original intention. The Court found that the term "cy-pres" must have been intended to bear a similar meaning in the context of reforming STAR trusts.
Discretion to refuse to reform through cy-pres
Chief Justice Smellie found that in the following circumstances and in the absence of any express wording to that effect in the relevant section of the legislation, the court does not have the discretion to refuse to exercise reformation:
- the court is satisfied that the trust's execution has become, for example, obsolete; and
- the trust can be reformed consistently with the trust's general intent (and it should be reformed through cy-pres).
The Court accordingly exercised the power of reformation in the manner that it was invited to by the trustee – namely, by inserting, into the deeds of the trusts, a short provision that gave the trustees the powers necessary to fulfil the original intentions of providing for the beneficiaries in a tax-efficient way.
STAR trusts are increasingly used:
- for holding operating companies;
- as effective dynastic family trusts for multiple generations;
- as private trust companies that act as trustees of family trusts; and
- as special purpose vehicles in a commercial context to hold assets off balance sheet.
Thus, this judgment gives welcome guidance and clarification of the principles to apply when changes need to be made. As families grow and become more globally mobile, and multinational in character, it is imperative that trusts can adapt sensibly to accommodate new circumstances and can be used as a flexible tool by trustees in the interests of ensuring that the trust's original intentions are fulfilled. This Grand Court decision shows the willingness of the Court to assist in reforming STAR trusts when circumstances require and the provisions of the legislation allow.
For further information on this topic please contact Rachael Reynolds, Anthony Partridge or Deborah Barker Roye at Ogier by telephone (+1 345 949 9876) or email ([email protected], [email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.
(1) It was not suggested that the execution of either trust was or had become:
- impossible or impracticable;
- unlawful; or
- contrary to public policy.
(2) The court opined that, in respect of the special regime for non-charitable purpose trusts, it was inconceivable that the drafters would have used the term "general intent" if they had meant "purposes". See paragraph 38.