Read our article in the Cayman Financial Review Magazine, eversion 

 The rise in philanthropy 

True philanthropy is not to be confused with charity. Philanthropy has been described as the pursuit of excellence in every facet of human life for every human life, by imagining and developing new ideas, which bring that philosophy to life and allow it to continue living. Ironically, the concept of philanthropic giving may, in some cases make its benefactor more wealthy, if he or she so wishes, thus distinguishing philanthropy, which may or may not yield a profit, from purely charitable activities which are strictly not-for-profit.  

The idea of philanthropy was originally developed by individual donors. Notable examples in the early 20th Century were Andrew Carnegie and John D. Rockefeller. Typically a group of friends or business associates would pool their funds and decide how to use the money to benefit the causes they cared about most. The re-emergence of philanthropy in recent years has been led by notable individuals such as Bill Gates and Warren Buffett, who have applied the techniques of business to philanthropy, introducing the concept of ‘philanthrocapitalism’. This trend has increasingly led philanthropists world-wide to search for suitable vehicles, such as trusts, to help sustain and develop the cause and grow the revenue with the aim of continued giving.  

Sir Stuart Reed, entrepreneur and founder of a recruitment business with a turn over of £750 million a year is quoted as saying: “Without charity what’s the point of business? And without business there would be no charity.” He recently coined the phrase “financial obesity is ugly”: “There are about 3,400 mass-affluent individuals in the UK – those with more than £20m in personal wealth. We need public pressure on these people to donate to charity. We tend to admire the guy with the new BMW, yacht or private aeroplane. The social pressure is on these people to show off by buying toys. We need more public pressure that encourages them that financial obesity is ugly”¹. Campaigns such as this which promote and advocate working for mankind and not just for the company have contributed to the latest philanthropic trend of giving: ‘the gift that keeps on giving’. 

STAR trusts and philanthropy 

 Why a STAR trust?  

Due to the growing philanthropic trends that are re-emerging and the rise of the new concept of philanthrocapitalism, many modern philanthropists seek to establish vehicles that provide flexibility and are capable of being administered efficiently in a tax neutral environment. One of the advantages of STAR trusts formed in the Cayman Islands is that no direct taxes arise.   

Many of the advantages that are unique to STAR trusts are embedded in their key features. The flexibility of STAR trusts originates in the fact that the objects of a STAR trust are not required to be purely charitable. Traditionally, charitable purposes fell under the Statute of Elizabeth², which were later identified by Lord Macnaghten as the four heads of charity: the relief of poverty, the advancement of religion, the advancement of education and other purposes beneficial to the community which do not specifically fall under the aforementioned³. The objects of a STAR trust may be charitable, partly charitable or non-charitable, giving rise to broad applications and flexibility. With the growing trend towards combining philanthropic giving with a viable operating business, a STAR trust is ideal as it can be established for purposes that are partly not-for-profit and partly revenue generating. 

Role of the enforcer 

The Trusts Law makes a distinction between an enforcer of the STAR trust and a beneficiary, demarcating a clear line between the right to benefit from and the obligation to enforce a STAR trust. This effectively removes the beneficiaries’ right to enforce the trust and the beneficiaries’ general entitlement to disclosure of information, thereby reducing the potential for claims by beneficiaries which is not likely to be desirable for philanthropic structures. Generally, the right to enforce the STAR trust does not rest with the beneficiary unless the beneficiary is also the enforcer. 

An enforcer committee could potentially be established to act as the enforcer of the STAR trust comprising members connected with the philanthropic endeavour. This would allow committee members that are directly involved in the philanthropic mission to participate collectively in the proper execution of the benevolent purpose of the trust. Alternatively, the committee could be made up of individuals with special expertise in relation to the philanthropic venture or a group of trusted individuals capable of carrying out a number of functions complimenting the overall structure. The committee may serve in an advisory or authoritative role. 

Whereas an uncertainty as to objects, mode of execution or administration might otherwise render a non-STAR trust void, the possibility exists of an application to the court, made by the trustee on a ‘cy-près’ basis, which provides the flexibility that a STAR trust can be reformed by the court in accordance with the settlor’s general intent. The purpose of such an application would be to vary the trust such that the purposes are carried out in accordance with the general intent of the settlor. The application of the doctrine of cy-près would be approved by the court in very limited circumstances. This feature provides additional comfort to the settlor, providing security that the STAR trust would not fail and the philanthropic endeavour would continue as intended.  

In addition, the terms of a STAR trust may grant the power to the trustee or any other person to resolve uncertainty of objects or the mode of execution. Again, where any uncertainty cannot be resolved by the trustee or the nominated individual, ultimate recourse lies with the court. The settlor philanthropist may be given the power to reform the objects of the STAR trust, thereby allowing future modification of the purposes and objectives of the STAR trust.  

In the Cayman Islands the trustee of a STAR trust must be, or must include, a trust company licensed to conduct business in the Cayman Islands. This should provide a level of comfort to philanthropists using Cayman Islands STAR trusts as other similar jurisdictions do not have such requirements for purpose trusts. It should also be noted that a Cayman Islands private trust company may act as the trustee of a STAR trust. 

Usefully, the trustee of a STAR trust may act as the sole shareholder of a PTC which acts as the trustee of the underlying related trusts. Typically, each trust is a PTC structure and will hold different classes of assets and one or more trusts may be established for different philanthropic purposes. The philanthropic ventures of the underlying STAR trust or trusts could be managed and controlled at board level by the directors of the PTC. 

The rule against perpetuities does not apply to STAR trusts. Therefore, the unlimited duration of STAR trusts eliminates the risk of a resulting trust in favour of the settlor at the end of the perpetuity period which might attract tax penalties. This is a further advantage of a STAR trust structure ensuring that the altruistic intentions of the settlor will continue indefinitely or as defined by the trust deed. 

Though a STAR trust may not hold land in the Cayman Islands, this does not preclude the trustee from holding an interest in a company, partnership or other entity which may. Consequently, organisations such as the National Trust or similar land preservation organisations which wish to preserve important landmarks for either historical or environmental value may not be precluded from using STAR trusts, if they do not wish to establish a purely charitable structure by other means. 

One of the many advantages of establishing STAR trusts for philanthropic purposes is that there is no difficulty in combining philanthropic objects with family or business objects. For example, a settlor may wish family members to play a part in the administration of the philanthropic structure. Another settlor may feel that in some parts of the world commerce is more beneficial than generosity, so he may establish a STAR trust to provide finance on a for-profit basis for businesses in undeveloped regions in the hope that the trust activities will generate a profit, so as to maintain or enlarge the fund devoted to the philanthropic purpose, and perhaps to provide some benefits for his family. In short, the STAR trust regime provides the philanthropist great latitude to determine how the settled funds are to be used.