STAR Trusts and Foundation Companies – Developing uses in the Digital Asset space
The Cayman Islands have a deserved reputation for offering a variety of alternative and original structures. While as a common law jurisdiction the concept of trust is one that is recognized, upheld and commonly used, the Cayman Islands nevertheless has alternative structures to rival the traditional trust arrangement. In this article, we will look at “STAR Trusts” and “Foundation Companies”, which are two examples.
We will first look at the Foundation Company which was introduced by its own legislation – the Foundation Companies Act, 2017 and is a structure which has gained popularity since 2017 especially for use in the digital asset space (eg as a decentralized autonomous organization (“DAO”), service provider to DAO, treasury for fungible tokens, NFTs and network for building digital asset ecosystems).As the name suggests, a Foundation Company is a corporation and therefore has some similarities to the more conventional types of corporations available in the Cayman Islands.A foundation corporation is registered with the Companies Registry, it has separate legal personality, it is incorporated with a memorandum and articles of association and it has a board of directors which is responsible for the day-to-day conduct of its affairs.
However, that’s where the similarities to more conventional corporations end, because while foundation corporations have some of the characteristics of a conventional corporation, they practically operate in a way that’s more akin to a trust. They therefore offer the functionality and flexibility of a trust, but without any of the complexities associated with administering the trust. Additionally, as a corporation with separate legal personality, it facilitates their recognition in civil law jurisdictions whose principles of “ownership” mean that common law trusts are often not recognised.
While foundation companies may (but need not in practice) have shareholders, shareholders in their capacity as shareholders are not entitled to receive dividends or other distributions. This can be contrasted with conventional corporations whose shareholders participate in the profits simply by being a shareholder. Instead, foundation companies have a category of interested parties called “beneficiaries” and it is these beneficiaries who (depending on the applicable terms) have the right to participate in any profits generated by the foundation company.
Also, while shareholders in more conventional corporations have some ability to control the affairs of a corporation (e.g. by appointing or removing directors or passing (or refusing to pass) shareholder resolutions) and have the right to access certain corporate records, beneficiaries of a founding corporation do not have such rights. The rights of the beneficiaries, if any (including with respect to their right to distributions) must be expressly provided for in the constitution of the founding company. Therefore, those who choose to set up a foundation corporation have considerable flexibility in determining what beneficiary rights will be and when they will occur. intentions of the founder.
While the foundation company ownership structure described above undoubtedly has its advantages, the lack of shareholder control removes one of the important checks and balances of a foundation company’s corporate governance. It is for this reason that foundation companies are required to have an “oversight” whose role is to oversee and hold the board accountable. The role of a comptroller can be more important, to the extent provided for by constitutional documents and it is common for the constitution to provide a number of “reserved matters” in favor of the comptroller, which can range from the right to appoint and remove the Supervisor, directors and/or beneficiaries of the right to amend the constitution of the founding company.
A foundation company is also required to have a secretary who is either licensed or authorized by the Management of Companies Act (2021 Revision) to provide “company management services”. The secretary must also indicate the registered office of the founding company in the Cayman Islands.
Foundation companies can also set up internal regulations that can extend, modify or supplement the constitutive documents. The Articles of Association can help with the administration of the Foundation, but since they are not part of the constitution, they are a document that remains entirely private.
Use in practice
As can be seen from the above, those who choose to use a foundation corporation as their corporate vehicle have considerable flexibility as to how the foundation corporation will be established, governed, and what rights each person will have. associated with it. It is therefore not surprising that the uses of Corporate Foundations are just as varied.
Endowment companies have proven popular with Family Offices and have also been successfully deployed for philanthropic and estate planning purposes more generally given the relevance of “beneficiaries” to the structure and the fact that the involvement of these beneficiaries in the foundation company beyond their financial rights are limited. Foundation companies have also been used to create charitable/non-profit foundations, while they have also been successfully deployed for purely commercial projects, especially in the area of digital assets (e.g. as DAO, cash for fungible tokens, NFTs and network for building digital assets (ecosystems).
STAR Trusts (meaning “Special Trusts – Alternative Regime”) are created pursuant to Part VIII of the Trusts Act (2021 Revision). STAR trusts are generally discretionary trusts, but they can mostly exist for charitable or non-charitable purposes, provided the purposes are “lawful and not contrary to public order”. The ability to combine charitable and non-charitable purposes is a unique feature of the STAR Trust structure and underlines its inherent flexibility.
Also, unlike other trusts, the lifespan of a STAR trust is not limited by the rule against perpetuities and therefore the usual position that limits their lifespan to a maximum of 150 years does not apply. – i.e. a STAR trust can be of unlimited duration.
The settlor of a STAR Trust has considerable flexibility in defining who, or what general purpose, will benefit from the STAR Trust and on what basis. The participation of any beneficiary in the STAR Trust is strictly limited to the financial benefits granted by the terms of the trust. This is because, like foundation companies, a beneficiary of a STAR Trust has no right to enforce the terms of the STAR Trust, either through actions against the trustee or by having access to information on the activities and current financial situation of the STAR Trust. .
As with foundation corporations and because beneficiaries of the STAR Trust have no enforcement rights, the checks and balances on the administration of the STAR Trust are provided in a different manner. The two key positions to fill in a STAR Trust are (1) Trustee; and (2) the executor.
The trustee fulfills the usual role of a trustee in an ordinary trust by holding legal title to the assets of the STAR trust on behalf of the beneficiaries. Unless otherwise ordered by a court, a STAR trust requires the trustee to be (or if there is more than one) a trust company, which is an entity licensed to engage in “trust business”. in the Cayman Islands.
A STAR Trust must also have an Enforcer, who is the only person who has the ability and power to enforce the terms of the STAR Trust and hold administrators to account. The Enforcer may, but need not, also be a Beneficiary. If they are also beneficiaries, they can only enforce the terms of the STAR Trust in their capacity as executor on behalf of all beneficiaries and not as individual beneficiaries.
Use in practice
As with foundation companies, the flexibility inherent in the structure of STAR Trust means that it has been applied in many different ways since their inception in 1997. For example, they have been used (i) to ensure an orderly succession of interests in family businesses (the limited rights of the beneficiaries to enforce the terms of the Trust being again particularly useful), (ii) for philanthropic purposes, (iii) as a substitute for an “ordinary trust” in order to obtain the benefit of the indefinite term of a STAR Trust and to restrict or limit the level of information to which beneficiaries would otherwise be entitled to access under an ordinary trust, (iv) in financing transactions and investment to facilitate the move away from “off balance sheet” or bankruptcy in asset holding, (v) as a holding vehicle for valuable moveable property such as art, jewelry and d vehicles and as an alternative to a charitable trust (particularly where the objects of the trust may be a combination of charitable and non-charitable).
However, a limitation of this structure is that no land in the Cayman Islands (or any interest therein) may be held by a STAR Trust. A STAR Trust would, however, be permitted to have an interest in another entity that owns land in the Cayman Islands (or an interest in it), but only for the purpose of carrying on its business.
As can be seen from the above, the two structures we have considered offer great flexibility for many different types of application. While there is a considerable degree of overlap between the two, business purpose and/or project originator preference will dictate the use of one over the other.