The Cayman Islands STAR Trust: Transparency for Funds and Investors

STAR Trusts were created in the late nineties, when the Cayman Islands government was looking for a way to grant more flexibility to its trust structures.

The benefits of STAR Trusts

A key element of the STAR Trust, a form of statutory trust which is exclusive to the Cayman Islands, is that it may be created for the benefit of either a person or a purpose (whether charitable or not), or for both. This expands its utility far beyond the capabilities of an ordinary trust, historically used for charitable endeavors and wealth preservation, to cover commercial and investment purposes.

Given the need of an Enforcer, an individual or a corporate entity appointed by the Settlor or Economic Founder to enforce the terms of the STAR Trust, it also provides for further control, managing expectations from institutional investors whilst ensuring a separation of economic and voting/management objectives.

Furthermore, any uncertainty as to the objects or mode of execution or administration can be resolved by the Trustee, by another person as identified in the trust deed or by the Cayman Courts. This greatly diminishes the odds of a STAR Trust being considered void ab initio due to uncertainty, which is something that could happen to an improperly written ordinary trust.

Commercial use

As investment managers are entrusted with the investments of third parties, there is often a desire to create a clear separation between the assets belonging to the management company and those that belong to its clients. This can be easily achieved by establishing a STAR Trust which can hold the management shares of an investment fund.

One of the benefits of this arrangement is that it allows management control to be entrusted in a Professional Licensed Trustee in the Cayman Islands, as this is one of the requirements of a STAR Trust. This set-up allows for flexibility, providing an arms-length approach, where an independent Professional Licensed Trustee holds management shares in the company, assures good governance and specialized care for investment funds, structured finance vehicles and other corporate bodies, whilst the investment manager, who often also acts as the Enforcer, maintains control and the investors keep all economic rights.

By choosing a Trustee to hold the management shares of a fund in a STAR Trust, the structure gains robustness and offers transparency to its investors, splitting rights and mitigating risk overall, offering further protection and specialized services in the form of the Trustee.

Key Concepts – STAR Trusts

Trustee – Must be or at least include, when multiple, a trust company licensed to operate in the Cayman Islands.

Enforcer – May be an individual or a corporate entity appointed by the Settlor or Economic Founder to enforce the terms of the STAR Trust, including against the Trustees if necessary.

STAR Trust – Is created by a trust deed or declaration of trust and must have a Settlor or Economic Founder, a Trustee and an Enforcer. The Settlor or Economic Founder may also act as Enforcer.