The Cayman Islands boasts a variety of innovative and flexible vehicles and structures, beyond the basic trust instruments, which can meet the structuring requirements of a range of entities, from charities to commercial ventures. Foundations and special trust alternative regime (STAR) trusts are among the structuring options available; while they are similar in terms of the flexibility that they afford, both vehicles have distinct properties which may make one more suitable than the other, depending on the circumstances and requirements.
The STAR came from the original enacting legislation of 1997, which was known as the "STAR Law". The STAR Law is now Part VIII of the Trusts Act of the Cayman Islands. STAR trusts are essentially non-charitable purposes trusts that can take a variety of forms and are usually discretionary in nature, albeit with some powers reserved, usually to the enforcer. STAR trusts are unique to the Cayman Islands.
The law relating to STAR trusts is the same as that for ordinary trusts (eg, discretionary trusts) unless expressly provided for in Part VIII of the Trusts Act.
Purposes and persons
The main difference between an ordinary trust and a STAR trust is that a STAR trust can exist for non-charitable purposes, rather than for persons or beneficiaries. For example, a non-charitable purpose may be to own and operate a particular business. However, a STAR trust can also have beneficiaries.
The trustee(s) of a STAR trust must have or include a licensed trust company or a private trust company in the Cayman Islands.
The trustee(s) of a STAR trust must also ensure that the settlor understands who will have standing to enforce the trust.
Therefore, the legislation introduces the concept of an enforcer, which is the only person or entity that can enforce the terms of the trust against the trustee(s).
The enforcer can hold one or more reserved powers – including to:
- vary or amend the trust deed;
- appoint the trust fund's income and/or capital to beneficiaries;
- act as director of a company owned by the trust;
- make investment decisions;
- appoint or remove trustees;
- add or remove beneficiaries;
- change the governing law of the trust; and
- restrict the exercise of any trustee powers or discretions by requiring that they will be exercisable only with the consent of the settlor or protector.
In addition to the basic function of enforcing the trust, the role of enforcer can also include certain protector functions.
One of the key features of a STAR trust is that the concepts of benefit and enforcement are separated. A beneficiary of a STAR trust has no standing to enforce the trust. This means that the beneficiaries have no rights to information or to hold the trustee to account. Rather, those rights are held by the enforcer.
This makes STAR trusts incredibly popular because of the ability to restrict beneficiaries' rights and give the enforcement power to a single, trusted individual – the enforcer.
It should also be noted that the rule against perpetuities does not apply to STAR trusts. Therefore, they are not subject to the 150-year lifespan of an ordinary trust.
How are STAR trusts used in practice?
STAR trusts, in combination with some forms of reserved-powers trust, remain the most common form of trust.
They remain popular due to their ability to strike the right balance between the settlor retaining a degree of control and the trustee avoiding liability from a large class of beneficiaries, with enforcement being vested in an enforcer.
Popular uses include in:
- dynastic family business trusts;
- philanthropic purposes;
- aircraft or yacht holding trusts;
- hedge fund structures;
- art holding trusts;
- litigation avoidance trusts; and
- typical estate planning structures.
A foundation company is a form of company that permits distributions to beneficiaries, rather than shareholders. It was introduced to the Cayman Islands by the Foundation Companies Act 2017 and was designed as a corporate alternative to a trust.
The constitution of a foundation company comprises the memorandum and articles of association. It is registered with the Registrar of Companies and, upon incorporation, receives a certificate thereof.
A foundation company does not normally have a shareholder or member and, if it does have a shareholder or member, it cannot pay dividends or make distributions to such person. Therefore, it is effectively ownerless and economic benefits are provided as distributions to the foundation company's beneficiaries.
In terms of corporate governance, interested persons in a foundation company are the directors and supervisor.
Board of directors
Day-to-day management of a foundation company, including the investment of the foundation company's assets, is conducted by its board of directors.
As a matter of good practice, it is recommended that the board meets regularly and that its meetings are recorded in board minutes.
A foundation company need not have a member (eg, a shareholder or a guarantee member); if it does not, it must have a supervisor. The supervisor may also be a director, although it would weaken the structure from an asset protection perspective if there was no separation of these roles.
Subject to any greater role provided by the constitution, a supervisor's main function, as the name suggests, is to supervise the board of directors' management of the foundation company. The supervisor can be a single individual or a supervisor committee that is established.
A foundation company must have a secretary that is licensed or permitted to provide company management services under the Companies Management Act (Revised). A foundation company must also have a registered office in the Cayman Islands, located at its secretary's business address. The question of who will provide the secretary is an important one to consider. There are numerous service providers in the Cayman Islands that have developed a certain speciality in this field.
A foundation company is prohibited from making distributions to its members but can make distributions in furtherance of its objects. The objects of a foundation company can include beneficiaries.
However, similar to a STAR trust, beneficiaries do not, unless otherwise provided for, have any powers or rights relating to the foundation company, its management or its assets; in other words, the default position is that claims can be made against a foundation company only by its supervisor or third parties. Beneficiaries, in their capacity as such, would have no rights to distributions (or even to be considered for distributions) or to call for reports, accounts or information and explanations concerning the foundation company's business and affairs. In this way, there are similarities between STAR trusts and a beneficiary's place.
Thus, in establishing a foundation company, the founder has considerable flexibility in designing the beneficial provisions of how and when beneficiaries will benefit.
Founder – reserved powers
Although day-to-day management of a foundation company is conducted by its board of directors, a foundation company's constitution can give any rights, powers or duties to its founder or indeed its supervisor. Those rights, powers or duties can, among other things, relate to:
- appointing or removing its supervisors;
- appointing or removing directors;
- the supervision of the management and operations, including:
- adding or removing beneficiaries; and
- making distributions;
- the enforcement of duties;
- the calling of, and attendance at, its general meetings; and
- altering the constitution.
The founder therefore also has considerable flexibility in designing the corporate governance structure, including building in checks and balances for the exercise of important powers.
The "Cayman firewall" is a set of provisions contained within the Trusts Act (Revised). The effect of these provisions is that the Cayman courts will not enforce foreign court orders made against Cayman-law governed trusts where such an order was made due to a personal relationship between a person and the settlor or beneficiary of the trust. This is an excellent protection against foreign divorce orders.
The Foundation Companies Act extends the Cayman firewall to also protect foundation companies.
How are foundation companies used in practice?
When the foundation company legislation was first enacted, foundation companies were extremely popular and widely used in the crypto and blockchain space for initial coin offering and security token offering transactions. They have become increasingly popular in more traditional wealth-planning arrangements, such as being used as private trust companies, wealth holding vehicles and for philanthropic or charitable purposes. A notable example in the Cayman community of the foundation companies legislation in full effect was the formation of a charitable foundation company in the Cayman Islands in 2020 in response to the covid-19 pandemic.
For further information on this topic please contact Anthony Partridge at Ogier by telephone (+1 345 949 9876) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.