As we approach the 30th anniversary of STAR Trusts in the Cayman Islands, we look at the developments and clarifications surrounding these structures since their establishment. With the passage of time, in addition to the statutory framework, we now have the benefit of accompanying case law clarifying the rights and obligations of the actors involved, as well as international recognition by foreign courts.
This review outlines the key developments in the area for everyone exposed to existing STAR Trusts, or considering the structure as a potential vehicle, including settlors, trustees, enforcers, beneficiaries and third-party service providers.
STAR Trusts overview
A STAR Trust is a form of statutory trust that is unique to the Cayman Islands. The name “STAR Trust” refers to Part VIII of the Trusts Act and is an acronym for that Part: Special Trusts – Alternative Regime.
A Cayman Islands STAR Trust differs from a standard form discretionary trust in two key ways:
- the trust may be either for the benefit of its purposes, or its beneficiaries, or both
- standing to enforce a beneficiary’s rights is given to an enforcer (rather than beneficiaries themselves, as would be the case in an ordinary trust)
If choosing to settle a trust for the benefit of beneficiaries, why would a settlor choose a STAR Trust over a standard form discretionary trust? One of the key advantages of the structure is that it reduces the risk of trust funds being depleted by familial squabbles, which usually arise when beneficiaries have standing to enforce their own rights rather than the enforcer.
Where all beneficiaries have standing to enforce their rights, rather than one fiduciary appointed to act on all beneficiaries’ behalf, the enforcement of competing interests can often result in time-consuming and expensive litigation.
However, in a STAR Trust, the enforcer is the only party with standing to enforce the beneficiaries’ rights. The enforcer must weigh up the competing interests of all beneficiaries and act in the best interests of the beneficiaries as a whole. The structure consolidates power within a single entity and ensures that all beneficiaries’ interests are represented and considered, while reducing the scope for litigation by mitigating the risk of infighting among beneficiaries.
To date, however, there has been some uncertainty about how much trouble a beneficiary can cause in trust proceedings involving a STAR Trust. What is a beneficiary’s role, and how much weight will a court give to their individual views against those of an enforcer?
G Trust
The G Trusts litigation concerns a Cayman-based trustee of a STAR Trust receiving certain assets from a separate trust. The validity of the transfer is disputed in separate proceedings in Hong Kong.
Ogier, acting for the Cayman-based trustee, applied on the trustee’s behalf to the Cayman Court for:
i) administration relief – the trustee sought court approval for it to administer the assets on the terms of the G Trust pending the determination of the issues in the foreign proceedings, including the validity of the transfer of assets into the G Trust
ii) beddoe relief for participating in the foreign proceedings in a neutral capacity, so reasonable costs associated with the trustee’s participation in the foreign proceedings could be deducted from the assets currently held by the trustee
iii) beddoe relief for bringing a construction and rectification application, which would confirm costs protection for the trustee bringing a separate application for the construction of a deed of addition of beneficiaries and, if the true construction did not reflect the intention of the document, applying to rectify it in accordance with that intention
The enforcer and the beneficiaries were joined to the application. The above relief was ultimately granted by the court despite objections from several beneficiaries of the Trust. The decisions arising from the application address the weight to be given to a beneficiary’s objecting views in similar applications.
In determining the beddoe relief for the construction and rectification application, the court considered whether a party should be appointed to present the counter-position to the applicant trustee, and, if so, who the appropriate party would be.
The court ultimately found that there was no automatic need for a counterargument in rectification applications under Cayman Islands law, and, in any event, that case management issues should be determined by the judge hearing the application rather than the beddoe judge.
However, the court, having referenced the “far more muted” voice of a beneficiary of a STAR Trust and the roles and responsibilities of the enforcer, observed that its preliminary view – that the objecting beneficiary group may be appropriate parties to present counter arguments – had been displaced, suggesting that the enforcer might be more appropriate party to take any such role where necessary.
The enforcer and the beneficiaries
The enforcer enforces the trust on behalf of the beneficiaries. They hold the trustee to account and ensure that the trust is administered in furtherance of its purposes and/or for the best interests of the beneficiaries as a whole.
The enforcer will often be a party to trust proceedings concerning a STAR trust – either as an applicant or as a respondent – so the beneficiaries’ views may be represented in those proceedings through the enforcer.
Beneficiaries of a STAR trust don’t necessarily need to be parties to trust proceedings, but an applicant may wish to join them for a number of reasons:
- the applicant may wish to provide the beneficiaries with a forum to set out their views on a particular proposal, which may help the court understand the position of all relevant stakeholders (if it is not clear from canvassing correspondence), and/or to assist the trustees and the enforcer in complying with their duties to act in the best interests of the beneficiaries
- the applicant may wish to ensure that all beneficiaries are properly bound by the court’s orders, including in foreign proceedings
Where beneficiaries of a STAR trust are joined to trust proceedings, it is important to understand the weight the court will give to their views. As mentioned above, Mr Justice Kawaley (retired), in the second rectification beddoe decision, accepted: “…the unanimous broad submission that the voice of a beneficiary in relation to a STAR Trust is far more muted compared with the standard position in relation to an ordinary trust.”
In a subsequent decision as to costs, Mr Justice Kawaley added, without making any definitive finding on the point,: “Does the STAR Trust regime impose more onerous burdens upon beneficiaries whose interests are legally protected by an Enforcer to exercise restraint when invited to participate in a directions proceeding? I would answer affirmatively if required to resolve this question.”
As to the weight that the court will give the views of the enforcer, Mr Justice Kawaley observed: “…in the context of a partisan dispute between beneficiary factions in which the Trustees are obliged to adopt a position of neutrality, the Enforcer’s non-partisan views of where the best interests of the beneficiaries lie potentially carry considerable weight.”
Aside from the fact that the court will likely place less weight on the views of the individual beneficiaries and greater weight on the views of the enforcer, the G Trusts litigation also demonstrates that a beneficiary or beneficiary group can be penalised if they unreasonably disregard or fail to engage with the enforcer on their proposals in the litigation more generally.
In the “costs of the costs” decision: “Because if this Court did not carefully evaluate the reasonableness of the A Beneficiaries all but thumbing their nose at a rational encouragement by the Enforcer to compromise litigation, the Court itself would be guilty of thumbing its nose at the role conferred on enforcers by the STAR Trust regime (Trusts Act (2021 Revision), Part VIII).”
In that decision, while the first set of beneficiaries were still awarded their costs out of the trust assets, they were penalised with an order to pay 50% of the other set of beneficiaries’ costs.
Navigating the “litigation superhighway”
The best course for a trustee of a STAR Trust, or indeed a standard form discretionary trust, finding itself in a problematic or complex position, is to seek the court’s directions as soon as possible to ensure it is properly protected for the actions it takes.
In the G Trust litigation, the trustee’s approach in seeking beddoe and administration relief at the outset paid dividends in subsequent challenges by the beneficiaries, and that action was properly protected. As set out by Mr Justice Kawaley: “despite being collided with twice by the B Beneficiaries on the Litigation Superhighway, the hardy Beddoe ultimately remained on the road.”
In the case of the STAR Trust specifically, both the trustees and the beneficiaries would be well advised to maintain a strong dialogue with the enforcer. For the trustees, it is important to understand the beneficiaries’ views (via the enforcer) to ensure they comply with their duties and act in the beneficiaries’ best interests. Beneficiaries should ensure that the enforcer is well informed of their views so that the enforcer is best placed to formulate the enforcer’s position on behalf of all beneficiaries.
Conclusion
The decisions in the G Trusts litigation provide welcome clarification for trustees, enforcers, beneficiaries and third-party service providers exposed to STAR Trusts. The decisions have tested the roles and responsibilities of the various parties. As a result of the clarifications from these decisions, it is anticipated that STAR Trusts will become even more effective going forward as a favoured vehicle, offering greater protection against litigation risk and providing a straightforward and professional enforcement mechanism in trust structuring.
Deborah Parker Roye is a partner in Ogier’s Trusts Advisory Group,
