The evolution of purpose trusts is a prime example of the versatility of trusts as an estate planning vehicle. Traditionally, a valid trust had to be established for named beneficiaries or charitable purposes, and consequently, non-charitable purpose trusts were not recognised by common law. As a progressive response, some offshore jurisdictions have enacted legislation which provided for the creation of non-charitable purpose trusts.
The Bahamas’ Purpose Trust Act, 2004 (“PT Act”) and the Cayman Islands’ Special Trusts (Alternative Regime) Law 1997 (“STAR Law”), being incorporated in Cayman’s Trusts Law (2020 Revision) (“Trusts Law”), introduced forms of non-charitable purpose trusts which may be established for purposes (charitable or non-charitable) or for persons or a combination of them. The Bahamas’ authorised purpose trust (“PT”) and the Cayman STAR trust (“STAR Trust”) are capable of being perpetual in nature. While this is distinguishable from other Cayman trusts, except for charitable trusts, The Bahamas has abolished the rule against perpetuities for all trusts made after December 2011, unless the parties prefer some limited period for the existence of a trust.
Purpose trusts have become more popular because of their various estate planning and commercial uses, such as holding high-risk assets, creating dynasty-style trusts for the purpose of holding family assets, or where the information rights of beneficiaries need to be restricted. Although STAR Trusts and PTs are similar creatures, some distinctions follow.
Authorised Applicant/Enforcer
Since purpose trusts generally may not have beneficiaries, a person must be appointed to hold the trustees thereof accountable for administering such trusts in accordance with their stated purposes. Such person is known as the “authorised applicant” under the PT Act and the “enforcer” under the STAR Law.
Should there be no authorised applicant/enforcer acting, the trustee must put one in place pursuant to the trust instrument or apply for a court appointment of one. In the Cayman Islands, a trustee has a statutory duty to apply to their courts within thirty days of the absence of an enforcer or be liable to a fine, but a trustee of a PT is not subject to such strict statutory obligations. Perhaps, the duty of the trustee under the STAR Law is more onerous because unlike in The Bahamas, without an enforcer, a STAR Trust established in perpetuity or for a period of more than 150 years is likely to fail under the Trusts Law. Contrarily, even if a PT established in perpetuity falls outside of the realm of the PT Act, then such PT might still qualify as an ordinary trust as a result of the Rule Against Perpetuities (Abolition) Act.
Trustee’s duty to prevent unlawful acceptance
Further, the trustee of a STAR Trust commits an offence when it accepts property thereunder without ascertaining that the settlor or a person acting on his behalf understands who will have standing to enforce that STAR Trust. No such offence exists under the PT Act; conceivably, because in The Bahamas the settlor is automatically an authorised applicant, unless the trust instrument expresses otherwise.
Non-charitable purposes
It is doubtful whether a STAR Trust can state that its purpose is to hold the shares of its underlying company.[1] More complex wording is suggested to accomplish the settlor’s intention under STAR Law. The PT Act, on the other hand, creates certainty by providing that a PT “may be declared for a non-charitable purpose, including, exclusively or otherwise, the purpose of holding, or investing in shares in a company”.
Duty to oversee investments
In instances where the PT Act is silent, the law relating to PTs is the same as the law relating to ordinary trusts. That law includes the Trustee Act, 1998, which grants protection to a trustee of a trust where the trust instrument thereunder provides that the trustee’s power of investment is exercisable only upon direction of a third-party power holder. Therefore, the trustee is not liable if such trustee acts in accordance with that investment direction, fails to do anything other than act in accordance with that direction or fails to act if no such direction is given. Effectively, without the invocation of the statutory protection in the trust instrument, the trustee might have residual liability for investments. No such statutory exoneration is found in the Trusts Law.
In conclusion, PTs and STAR Trusts are kindred entities. Possibly, because the PT was introduced after the STAR Trust, such PT offers a bit more clarity and flexibility as evidenced by the differences outlined.
[1] Kessler, J., and T. Pursall. Drafting Cayman Islands Trusts, paragraph 17.5; Kluwer Law International, 2006.
ABOUT THE AUTHOR
Nia G. Rolle is an Associate in the firm’s Private Client & Wealth Management Practice Group. She has experience advising on trust administration and creation, wills, estate planning and company law.
The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases.
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