Benefiting from Cayman structures - STAR Trusts, Private Trust Companies, Foundation Companies and Privately Offered Funds
Philippa-Lucy Robertson and Eduardo D’Angelo P Silva
Latin American family offices are increasing in number and evolving in complexity to a degree determined by their size, investment objectives and strategies. While family offices come in all shapes and sizes, there are a variety of offshore structures, in particular Cayman structures, that are ideal for wealthy individuals and their families. These structures can be used singularly or in conjunction with each other as the needs of the family office evolve.
STAR Trusts
A STAR Trust is unique to the Cayman Islands and allows some of the limitations of traditional trusts to be overcome. For example, STAR trusts enhance the opportunities to plan for succession and intergenerational transfers of wealth by enabling the trust to run for people or for purposes or both, in perpetuity. STAR trusts provide the most flexible means to give a settlor control in perpetuity over the way the trust fund is managed; control is effected by the means and principles set out in the trust deed at the time the trust is settled with ongoing supervision by the methods described below.
Settlors of STAR trusts are attracted by the unique flexibility to meet potentially complex objectives in a manner determined by them to a greater extent than allowed by a trust established in other jurisdictions, including the BVI Vista Trust. The STAR trust’s objectives can include the holding of business assets to benefit both charitable and non-charitable ventures, as well as benefiting family members and connected persons in the same way traditional trusts are used. It is not a requirement for STAR trusts to have individuals as beneficiaries and it is common for settlors to establish STAR trusts for specific purposes.
Key characteristics of a STAR Trust:
can be settled for people, purposes (charitable and non-charitable) or both people and purposes;
the purposes may include the preservation of trust assets and may not require diversification, unlike most “ordinary” trusts;
they allow extensive flexibility to reserve powers to the settlor or the enforcer;
it may be the enforcer, not the beneficiaries, who have the right to enforce the trust and hold the Trustee to account and therefore beneficiary rights to information can be removed if the settlor chooses, this is helpful when family governance requirements restrict the standing of beneficiaries or a dynastic trust in perpetuity is established;
Beneficiary interests may be discretionary or fixed (where discretionary, they are not reportable under the Common Reporting Standard, except when a distribution is made);
the trust is required to have an enforcer, who may be an entity or a person, such as a family member or a trusted advisor. A protector is not required, but may also be appointed; the role can be tailored to a non-fiduciary one that can be fulfilled, for example, by a preferred legal advisor to provide valuable insight and comfort to the settlor;
can be structured to qualify as a Grantor or Non-Grantor trust from a U.S. tax perspective; and
the trust can run in perpetuity, making it ideal to serve as the core of an inter-generational dynasty.
Applications:
STAR trusts allow wealthy individuals and their families to establish trusts that can benefit charitable and non-charitable philanthropic ventures and projects;
the transfer of a family businesses into a STAR trust can enable a settlor to preserve and protect their interests in perpetuity so they are maintained for future generations;
a STAR trust may be established to hold the shares in a private trust company or the non-participating interests of a company thereby enhancing governance through independence; and
A STAR trust obliges the trustee to act according to the duty described in the trust deed rather than generally for the individuals or purpose who benefit from it. This ongoing focus on the settlor’s intentions prevails over the views of beneficiaries, whether they act as officers of trust companies or as individuals.
Private Trust Companies (“PTCs”)
A PTC is a company that is established (by the settlor) to act as trustee of a trust or group of family trusts. PTCs are exactly what their name implies; they are private trust companies controlled by the settlor’s choice of directors, possibly including the Settlor and his or her family together with internal and external trusted advisors. In this way, a corporate governance structure is established which may serve as the initial governance structure for a nascent family office or may reflect the wider governance model of an established family office.
The PTC determines who the beneficiaries of the trust will be as well as the terms and extent to which they will benefit. The trust over which the PTC is the trustee is usually a STAR trust enabling the PTC (as trustee) to act for purposes as well as for people, so it is ideal for philanthropic as well as family objectives.
Key characteristics of a PTC are:
PTCs are registered with the Cayman Islands Monetary Authority (“CIMA”) and the registered office must be maintained with a service provider holding a full trust licence issued by CIMA;
a PTC can only act as trustee for trusts where the settlors or contributors to the trust are connected persons and may not solicit business from companies or individuals that are not connected; and
there is no minimum net worth or public registration requirement.
Applications:
particularly helpful for wealthy families with a need for confidentiality and control over the administration of the trust assets and/or who have trusts in several jurisdictions and wish to use a PTC as trustee of all their trusts; and
ideal for Latin American families where the trust assets are comprised, in whole or in part, of an underlying operating business. The PTC enables the operating business to be held in a trust while the founder and/or other chosen family members retain the power to manage the underlying business. The risk of deemed control arising from the residence of PTC directors can be managed by 1) the PTC shares being held by the professional trustee on separate STAR trust; and 2) by the appointment of Cayman resident PTC directors as well.
Foundation Companies
The Cayman Islands introduced a new form of vehicle in 2017 in the form of the Foundation Company. It has features and flexibility that have been designed to allow a company, retaining separate legal personality and limited liability, to function like a civil law foundation or, in some respects, a common law trust.
Foundations have existed in many civil law jurisdictions for generations and have been used to hold assets, to fund charities and, in general, to fulfil some functions similar to a common law trust although such foundation structures have not sat as comfortably in common law jurisdictions as they do in civil law jurisdictions (just as the opposite is true of trusts). Because of this familiarity to intermediaries and clients in Latin America, Europe and Asia, foundations have been considered by many in the offshore world as the proverbial bridge across civil and common law. In the last decade several jurisdictions including the Bahamas, the Channel Islands and the Isle of Man passed legislation creating new legal structures emulating the civil law foundation.
The Cayman Islands, after considering other jurisdiction’s law and practice and observing the reported concerns of practitioners arising from the lack of applicable jurisprudence (normally essential to grant comfort as to court treatment in the event of a dispute), decided that it would be better to modify the well-known Cayman company and create a new, additional option for clients. Thus, the Foundation Companies Law was enacted, modifying certain aspects of the Companies Law to allow for the establishment of Foundation Companies.
Key characteristics of a Foundation Company:
Has distinct legal personality, holding assets in its own name and being able to sue and be sued;
May apply for a 20-years Tax Exemption Certificate;
Has Certificate of Incorporation, Memorandum and Articles of Association (referred as the Constitution), and Board of Directors;
Has members with limited liability, but may dispense with members after incorporation;
May not pay dividends or distributions to members;
Must have a Company Secretary licensed in the Cayman Islands;
May have By-Laws, a confidential document issued by the Founder or adopted in general meeting to govern the business of the Foundation and which can be legally enforced;
May have a Supervisor with rights to information and rights of enforcement against the Directors;
May have a Founder with powers to change the Supervisor, the Directors and the beneficiaries; and
May have beneficiaries with entitlement set by the By-Laws but no rights of information and enforcement.
Applications:
a Foundation Company can hold the shares in a private trust company, be used as a protector or enforcer of a trust or as a special purpose vehicle in financial or commercial transactions;
may be an attractive alternative to trusts, especially for HNW and UHNW clients in civil law jurisdictions, given the many features applicable to succession planning and asset protection;
may be used as an “orphan” or ownerless vehicle to hold management shares of investment funds or in structured commercial transactions;
may be included as part of a Family Office structure, directly to hold assets or as the top-holding entity, contracting with service providers, suppliers and staff members.
Advantages of Foundation Companies:
legal entity with existing corporate jurisprudence;
no requirement for accountability to beneficiaries;
By-Laws have stronger standing than Letters of Wishes and may be more easily amended; and
familiar to civil law practitioners, clients and tax authorities.
Privately Offered Funds
One of the many benefits of establishing trusts and family offices is the ability to diversify investments away from the original source of wealth, such as an underlying business and real estate in the settlor’s home jurisdiction.
Some investment strategies can be conducted through a private investment company (“PIC”) incorporated offshore to enable tax free growth of the investments held by the PIC. However, increasingly complicated lifestyles of HNW and UHNW families and their expanded range of investments (which may include private deals with other family offices or private equity houses and alternative asset classes including hedge funds) require a family owned fund.
A Privately Offered Fund is an investment platform which can be structured as a corporation, limited partnership, or a unit trust, but the most common format is the company and for HNW families, in particular, the Segregated Portfolio Company (“SPC”). Using SPCs allows for defined participation in some or all elements of the underlying assets, which are legally segregated from each other based upon the strategy or character of the assets themselves.
For example, there might be different beneficiary participations established by the family trust through a share class structure in the holdings of one segregated portfolio (each a sub-fund of the SPC) rather than another so that there can be variation of participation both within a segregated portfolio and between different segregated portfolios enabling a huge amount of flexibility.
Key characteristics of a Privately Offered Fund:
participation in and ownership of the fund is exclusive to a small group of owners (typically a family or private investment group);
unless the fund has a single investor, the fund will be required to be regulated either pursuant to the Mutual Funds Act (in the event of the fund being open-ended) or pursuant to the Private Funds Act (in the event of the fund being closed-ended). Regulation will require the fund to undertake an annual audit with a Cayman-approved auditor. Regulation of a fund can demonstrate its institutional standards and assist in oversight of service providers;
an independent administrator and investment manager (for an SPC, different managers can be appointed for different strategies pursued by each segregated portfolio); and
with CRS, FATCA and Controlled Foreign Corporation rules applicable in most countries, a fund provides a cost efficient and reporting-efficient international investment.
Applications:
suitable for HNW families or family offices requiring tax-efficient and compliant investment structures for international holdings and investments; and
ideal as investment/asset holding platform to legally segregate assets and participation in those assets amongst different beneficiaries in a family trust.
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