Jacob came to see me last week. He lives with his wife and family in South America where he runs a successful import and export business.
In 2005 he was persuaded to transfer his then growing business into a Cayman STAR trust. He came to see me concerned as to how robust the STAR would be against creditors, tax authorities or family disputes in the light of CRS.
In 1997 the Cayman set up the Special Trusts (Alternative Regime) Law. Given the industry climate in mid 1990’s it was very clever legislation which ticked all desired boxes of a settlor running a business.
Jacob is passionate about his business and he wants it to continue long after his death. He has three children; Ben, Deborah and Adam. Ben his eldest is a budding entrepreneur, he has set him up an agri business which is doing well. Samantha is married, but is feckless and Adam, his youngest would like to follow his father’s footsteps into the business.
Jacob trusts Adam with his business but does not want either Deborah or Ben to make decisions about it.
Jacob was drawn to the STAR trust because during his lifetime he could be the obligatory enforcer and on his death his son Adam could step into his shoes. Unlike a normal trust, a document expressed to be under the STAR regime gives the beneficiaries Ben, Deborah and Adam no rights, these are all reserved to a person called an enforcer.
Jacob also liked the STAR because he was not restricted in setting out what he wanted which was for the continuation of his import and export business for the benefit of his children.
If he had put this as a term in a normal trust, there could be a debate as to whether the trust was set up primarily for the benefit of his children, in which case it would be a valid trust, or was it primarily for the continuation of his business in which case the trust would be invalid. By setting up a STAR trust this debate was unnecessary since regardless of what was the dominant purpose it would remain valid.
Another feature Jacob liked was that if at any time the business was taken over or became obsolete or went bust, the purposes could be rewritten giving him flexibility which he liked.
The only feature Jacob did not like about the STAR was that he had to appoint a professional trustee resident and licensed in the Cayman Islands. He was not convinced that a professional trustee had any idea of how to run an import and export business or would make the best decisions about the family investment or the family. He had heard gloomy tales of professional trustees unable to make a decision without seeking endless legal opinions which sucked out the cash resources of the trust and slowed down the speed of decision until making a profit was an impossibility. But the benefits outweighed his concerns until now.
I made it very clear to Jacob that I did not know how his government in South America would treat the knowledge that he had set up a STAR trust and that he continued to be the obligatory enforcer. All I could do was to go back to basics and apply them to the CRS regime.
Under CRS the trustee in the Cayman would need to report the existence of the STAR and that Jacob was the settlor and obligatory enforcer. What would it do with this information?
There would probably be little point in trying to argue sham because the STAR is a creation of specific legislation which obliges the settlor to appoint an enforcer so the existence of an enforcer will not render the trust void and even if they could get such an order in the country where Jacob lived, it would not be enforceable in Cayman.
So where would it be most vulnerable? The weakest link has to be the enforcer and his extensive powers. Why? Because he is living in the country which wants his trust assets taxed.
The case of Anderson in the US shows just how much of a danger this can be. Mr and Mrs Anderson lost their case against the IRS. They claimed that the money in trust was no longer theirs and therefore they could not compel the trustees to make distributions to them to meet the tax due. The IRS simply locked them up until the trustees saw that to make distributions was in the best interests of the beneficiaries!
In the case of Jacob’s trust, his tax authorities if they did not have suitable anti-avoidance legislation on transferring assets offshore, could run the argument that Jacob, given his extensive powers as an obligatory enforcer, was a quasi- trustee and therefore taxable in his home country on all income and gains.
If he refused to pay the tax, they could simply lock him up until such time as he did!
The STAR, when created in the 1990s, was the belle of the ball but I am not sure now twenty years on in the cold light of CRS, she is just as lovely. I welcome your comments.
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