Cayman Islands: Sky-high Standards In STAR Trusts

The STARring Idea: Introduction To The Concept

Although it sometimes comes as a surprise, STAR trusts are not actually the Cayman Islands’ only form of trust offering, just as VISTA is not the only British Virgin Islands trust. Cayman trusts can cover the full range: discretionary or fixed interest, beneficial or purpose, reserved powers or fully managed, innovative or entirely traditional depending on settlor requirements.

But STAR trusts are the most famous. Aside from existing indefinitely with no compulsory trust/perpetuity period, in a STAR trust:

• The objects can be beneficiaries, or purposes, or both.
• The beneficiaries have no right to information or to bring proceedings against the trustee concerning the trust’s administration. Instead, one or more enforcers must be appointed, which will have such rights and which is usually defined as a fiduciary role.

These features derive from the argument, pioneered by the Hon Justice David Hayton and others, that modern trusts are better thought of in terms of obligations attached to property, rather than a hazy concept of ownership still in some way attaching to the beneficiaries. The latter is often not appreciated by settlors from civil law backgrounds, and produces logical but odd results such as the rule in Saunders v Vautier[1] which can come as a shock when discovered. Such settlors tend to think of a trust as a quasi-contractual obligation with the trustee (albeit with heightened duties), and that is what a STAR trust represents in that the tasks a trustee can be asked to do are more varied than simply investing assets for the benefit of beneficiaries.

Certainly, a STAR trust can be set up with an equal intention to benefit purposes as it does its beneficiaries. An Ultra High Net Worth (UNHW) individual may set up a trust to benefit his family, but also non-charitable interests such as, say, encouraging young entrepreneurs.

But many other STAR trusts are founded with the expectation that in the actual administration of the trust, only beneficiaries will benefit. In such trusts, the purposes may be instead drafted as ways to resolve the longstanding ‘prudent investor’ principle, that is in summary, a trustee, if fully responsible for the investment and management of the trust assets, is constrained by its fiduciary duties to in practice take a conservative investment approach. We see STAR trusts used to solve this in two principal ways:

• The approach of reserving the trustee’s powers and duties over investment and management to a third party. Different jurisdictional trust laws do this in different ways, but in STAR a purpose may be, for example, that the trustee leaves the investment and management of the trust assets to certain persons, or that the trustee shall not sell certain designated assets.
• A more unusual and innovative approach, that of keeping such powers and duties with the trustee, but making one of the purposes to invest in cryptocurrency, or whiskey, or property developments in high-risk areas, etc.

In this second way, a STAR trust can even be drafted reasonably ‘traditionally’ if the client wishes, with the phrasing making it clear that the only objects for distributions will be its beneficiaries, and full powers given to the trustee, save that the trustee has actually expanded powers to invest in asset classes which it would normally feel obliged to avoid.

That said, a STAR trust is clearly untraditional as regards the powers of the beneficiaries to receive information and enforce the trust, which are instead given to a third-party enforcer (albeit that enforcer can be anyone, including a beneficiary themselves). And in this regard, we turn to the duties of the trustee and enforcer themselves.

All-STARs: How The Roles Of A STAR Trust Play Out In Practice

The part of Cayman legislation that deals with STAR does not define a STAR trustee’s fiduciary duties differently to those of non-STAR trustees, so we may assume they are the same, except that they will need to be exercised not in the best interests of the beneficiaries, but of the ‘objects of the trust’ (which include beneficiaries, purposes or both). The enforcer’s powers and duties regarding the enforcement of the trust are drafted similarly widely as per section 101(2) Cayman Trusts Act (2021 Revision): ‘Subject to evidence of a contrary intention, an enforcer is deemed to have a fiduciary duty to act responsibly with a view to the proper execution of the trust.’

The wording as regards the enforcer, and the expanded objects to which the trustee owes its duty, both emphasise the fundamental nature of the STAR Trust as being one of obligation and the exact terms of the instrument.

Section 101(2) was also fundamental to the most recent case regarding the duties of a STAR enforcer, that of AA v JTC (Cayman) Limited (FSD 12 of 2024 (IKJ)), because it allowed the Court to confirm that an enforcer has standing to apply for the Court’s ‘blessing’ (confirmation) of a ‘momentous’ decision on the same legal basis as a trustee, and to set out how the Court will approach such an application.

We noted above that some STAR trusts reserve the trustee’s powers and duties over investment and management to a third party. AA v JTC involved one such trust. The enforcer of that trust wished to obtain the Court’s blessing over an instruction to the trustee to exercise certain rights attached to shares it held. The exercise of these share rights was central to the purpose of the trust.

Blessings are sought through section 48 of the Cayman Trusts Act which has essentially codified what is generally known as Public Trustee v Cooper [2001] WTLR 901 applications. Section 48 itself only mentions applications by trustees or personal representatives. However, following discussion, the Court agreed that the part of the Act dealing with STAR trusts, in particular sections 98 and 101-102, serves to modify the general parts of the Act so far as they relate to such trusts.  

In its decision the Court thought section 101(2) particularly important, again: ‘Subject to evidence of a contrary intention, an enforcer is deemed to have a fiduciary duty to act responsibly with a view to the proper execution of the trust.’

This was because, like other offshore courts, the Cayman Court is determined to ensure the proper exercise of fiduciary powers. This focus was in evidence when Justice Kawaley considered the application itself. He classified it as a ‘category 2’ case under Cooper “where the issue is whether the proposed course of action is a proper exercise of the trustees' powers where there is no real doubt as to the nature of the trustees' powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers.”

How did the Cayman Court approach the enforcer’s application? The Cayman Court applied, as it has done in other such cases before it, the following tests:

(1) Does the trustee (or enforcer) have the power to enter into the proposed transaction?

(2) Is the Court satisfied that the trustee (or enforcer) has genuinely concluded that the proposed transaction is in the interests of the trust and the beneficiaries, and/or in furtherance of its purposes?

(3) Is the Court satisfied that a reasonable trustee (or enforcer) would arrive at the relevant conclusion?

(4) Does the trustee (or enforcer) have any conflict of interests which prevents the Court from granting the approval sought?

Once again, in the Court’s reasons for deciding to grant the application, we see the heavy imprint of section 101(2) fiduciary duty. Section 48 already cancels any protection provided by an application where “any fraud, wilful concealment or misrepresentation was committed” in obtaining it. In other words, full and frank disclosure (one of the basic elements of a fiduciary duty) is expected. In applying these tests, the Court was particularly pleased that the enforcer had “genuinely decided that the proposed instruction to the trustee was in the best interests of the trust and in furtherance of the purposes for which it was established”, and that the decision “followed careful deliberation and receipt of appropriate legal advice”.

The fourth test regarding conflict of interests is very apposite, because enforcers will often be family members or advisors of the settlor, and even be a beneficiary themselves, and hence more often have a conflict of interest. Here, the enforcer may have had arguable potential conflicts, but properly disclosed them, and the Court considered that they were not impeded by those potential conflicts from concluding that it was appropriate to give the relevant instruction.   

Therefore, the case of AA v JTC (Cayman) Limited not only shows that STAR enforcers can make Cooper applications to the Cayman Court in the same way as trustees, it also repeats that the Court, although not placing onerous demands on applicants, will not act as a mere rubber stamp. It expects to see the same careful deliberation and proper motives from STAR enforcers as we would expect from any fiduciary role. Once again, we see the emphasis on obligation, and upholding of high standards.

[1] (1841) Cr & Ph. 240

[2] (1841) Cr & Ph. 240

Matthew Howson
Matthew is Counsel with Harney Westwood & Riegels LLP in London, UK.

Henry Mander
Henry is a partner with Harney Westwood & Riegels LLP in the Cayman Islands.