The stars come out

  • Author : Antony Duckworth
  • Date : August/September
ABOUT THE AUTHOR: Antony Duckworth TEP is a Partner at Charles Adams Ritchie & Duckworth Attorneys at Law

Cayman’s Special Trusts Alternative Regime (STAR) legislation allows the trust instrument to give the trustee tasks or purposes of any kind, on a discretionary or non-discretionary basis. But, for reasons discussed in this article, the tasks or purposes must meet certain requirements. They must be:

  • imperative, not merely permissive
  • sufficient, in the sense of providing a criterion to guide or judge the trustee’s conduct
  • certain, though the legislation enables most uncertainties to be resolved; and
  • lawful and not contrary to public policy.
The task or purpose must be imperative

This reflects the fundamental distinction between a trust and a power1. Unless the trustee has a duty (to carry out the task or purpose), there is no trust. The trustee may be given discretion how to do so, but if the trustee has discretion whether to do so, there is no trust.

The task or purpose must be sufficient

The trust instrument must provide direction to the trustee. There are obvious practical reasons for this. But there is also a technical reason: unless the trust instrument provides sufficient direction, the court cannot control and enforce the execution of the trust, so the court will declare the trust void. This requirement also comes from fundamental trust principles inherited from England2.

To explain: if the trust instrument gives the trustee insufficient direction, the court will not always be able to judge whether the trustee has acted properly or improperly, so the court may be unable to respond to complaints; likewise the court may be unable to respond to a request from the trustee for opinion, advice or direction with regard to the future administration of the trust, and the court may be unable to undertake the administration itself, should the need arise. It has, for a long time, been a fundamental principle that the court will not recognise as valid a trust that it may be unable to control, enforce and execute.

There is no problem in giving the trustee wide discretions, but the court will not make arbitrary decisions, so there needs to be a criterion (expressed or implied) to enable the court to exercise the discretion if the need arises.

An example of insufficiency is that sometimes special purpose vehicles (SPVs) are held on trust for a purpose expressed simply as ‘to retain the shares of the SPV’. These words are clear, but they are not sufficient. They do not provide a criterion that would guide the trustee (or the court) when making the decisions that may need to be made, for example when appointing or removing directors, ratifying actions of the directors, making regulations, changing the memorandum or articles, approving a reorganisation or scheme of arrangement, or approving continuation to another jurisdiction. Trusts expressed in this way may also be struck down for public policy reasons (see below). It is usually easy to avoid the problem by stating the purpose for which the SPV has been created.

The task or purpose must be certain

Again, there are obvious practical reasons for this requirement, but there is also a technical reason affecting the validity of the trust.

The Trusts Law provides that a STAR trust ‘is not rendered void by uncertainty as to its objects or mode of execution’ (s103(1)). But one must read to the end of the section.

The trust instrument ‘may give the trustee or any other person power to resolve an uncertainty as to its objects or mode of execution’ (s103(2)). If the trust instrument does not contain such a power, or for some reason the power has not been exercised, the court has jurisdiction to resolve uncertainty.

This is a user-friendly regime, but there is a limit: ‘Insofar as the objects of the trust are uncertain and the general intent of the trust cannot be found from the admissible evidence as a matter of probability, [the court] may declare the trust void’ (s103(4)(b)).

Suppose, for example, that the objects clause of a STAR trust simply directs the trustee to ‘make the best use of’ the trust assets. This language is of uncertain meaning: what is meant by ‘best’? Not only would this trust suffer from uncertainty, but I doubt that the court would feel able to resolve the uncertainty. Unless there was other (admissible) evidence of what the settlor meant by ‘best’, the court would have to declare the trust void.

Though the requirements of sufficiency and certainty overlap, and derive from the same fundamental requirement (to provide sufficient direction for the trustee to execute the trust and for the Court to control and enforce execution), they are not co-extensive. The SPV example illustrates that a purpose may be certain as far as it goes, but insufficient.

“The court will not recognise a trust that it cannot control, enforce and execute”
The task or purpose must be lawful and not contrary to public policy

This is required by s99 of the Trusts Law.

Public policy is a difficult subject, particularly for purpose trusts, because for obvious reasons English courts have had little reason to consider it in that context. In my booklet on STAR trusts I suggested that ‘the legitimation of purpose trusts may well increase the number of cases in which the public policy question arises, but it is unlikely that the courts will wish to cramp their style by laying down principles or lists, except of a most general nature’. I quoted a commentator who said: ‘If the purpose of the trust is capricious, useless, wasteful, harmful, illegal or otherwise contrary to public policy, it will fail’3, and guessed that this is about as much as one will ever be able to say.

In particular, care is needed because of the public policy against tying up wealth (usually described as the policy against restraints on alienation).

The Perpetuities Law 1995 abolished (for new trusts) the common-law rules against perpetuities and trusts of excessive duration, and substituted a new and comprehensive rule against perpetuities. Cayman has never had mortmain or accumulations legislation. The Perpetuities (Amendment) Law 1997 provided that the rule against perpetuities does not apply to a STAR trust. In my opinion, however, that does not disapply the whole public policy.

Expect conditions restraining the alienation of property to be struck down, as in England, unless an exception applies, e.g. the restraint is imposed not to make the property inalienable, but to effect an object that is itself lawful. For this reason I think a trust that is simply to retain particular property offends public policy (as well as being insufficient).

Also expect a Cayman court to look closely at any STAR trust whose duration is not merely indefinite (in that there is no limit to how long the trustee has to dispose of the fund) but is perpetual (in that the trustee may not dispose of the whole fund). The court may look even more closely if the perpetual trust ties up income as well as capital, i.e. requires or permits indefinite accumulation of some or all of the income. This is not to suggest that a perpetual accumulative trust would necessarily be struck down, but the court would require persuasion that the tying up was justified.

The need for a power of reformation

It is in the nature of purpose trusts that changing circumstances may render them obsolete or in need of amendment. This can be left to the court, which has power under s104 of the Trusts Law to reform a STAR trust cy-près if its execution has become impossible or impracticable, unlawful or contrary to public policy, or obsolete (failing to achieve the general intent). However, s104 makes clear that the trust instrument may contain its own mechanism for reformation in these or other circumstances, and this is usually seen as the better approach.

The need to specify the general intent

Many STAR trusts express the purpose or task generally, then say how it is to be carried out, giving the trustee as much or as little discretion as is desired. This is usually a good drafting approach.

Sometimes STAR trust instruments give the trustee specific directions what to do but do not express the purpose of the directed action. Generally, unless the trustee’s task is to be totally non-discretionary, and the draftsman has dealt with all possible eventualities, this approach is not recommended.

Another reason for specifying the general intent is that if the court’s assistance is sought under its jurisdiction to resolve uncertainty, or to reform the trust in light of changing circumstances, it will be necessary to establish the general intent. If that cannot be established to the court’s satisfaction, the court may declare that the trust is void or has failed.

Incorporating explanatory memorandums

Often the settlor of a STAR trust wants to give the trustee a full explanation of the trust’s purposes or philosophy, or the settlor may have a great deal to say about the projects that the trustee is to carry out or support. These things can be set out in the trust instrument itself, but more usually they are set out in a separate explanatory memorandum, expressed informally, with a suitable linking clause in the trust instrument, giving the explanatory memorandum the desired effect on the trustee’s duties.

The linking clause may simply require the trustee to obey the memorandum, but usually the obligation is qualified as the settlor is trying to give guidance, not create inflexible rules. Sometimes the trustee need take the memorandum into consideration only when exercising discretions.

Including a default trust

Many STAR trust instruments include a default trust, to take effect if the primary trust has been completed or for one reason or another cannot be carried out any further – or, sometimes, if the trust assets exceed what is required for the primary trust.

Sometimes a default trust is included when there is no expectation that it will ever come into operation; it is included to deny the possibility of a resulting trust in favour of the settlor.

Care is needed

Professor David Hayton (now Justice David Hayton of the Caribbean Court of Justice) observed in the preface to my booklet on STAR trusts that ‘the Cayman legislation provides the safest and most flexible legislative framework for a multitude of valid purpose trusts’. The STAR regime does give maximum safety and flexibility, and it is useful in the private, commercial and philanthropic fields. But there are a few requirements, as noted in this article, and care is needed in drafting the purposes.

The Trust Law s98 provides: ‘The law relating to [STAR] trusts and powers is the same… as the law relating to ordinary trusts and powers, save as provided in this Part’
In Morice v The Bishop of Durham [1803-13] All ER 451 p458 Lord Eldon said ‘as it is a maxim that the execution of a trust shall be under the control of the court, it must be of such a nature that it can be under that control; so that the administration of it can be reviewed by the court; or, if the trustee dies, the court itself can execute the trust; the trust therefore, which, in case of maladministration could be reformed; and due administration directed; and then, unless the subject and the objects can be ascertained, upon principles familiar in other cases, it must be decided that the court can neither reform maladministration nor direct a due administration’
Peter Crampin QC in Glasson: International Trust Laws, paragraph B.4.22

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