Cayman STAR Trusts: A Powerful Structure for Employee Benefit Trusts and Master Insurance Policies

The Cayman Islands is a premier jurisdiction for innovative trust structures, and its STAR trusts have gained prominence for their flexibility and utility in corporate settings. STAR Trusts are a form of trust that is unique to Cayman and have a wide variety of practical applications. Introduced in Cayman by the enactment of the Special Trusts (Alternative Regime) Law, 1997, which is now contained in Part VIII of Cayman’s Trusts Act (2021 Revision), the unique features of a STAR Trust provide clients with structuring options that are often not possible with an ordinary trust, and which can be particularly useful in a commercial and transactional context.

As a pure purpose trust, a STAR trust is suitable for use in financing transactions where previously a form of charitable trust might have been used to hold shares in a special purpose vehicle. This is advantageous for when assets need to be held off-balance sheet or to create “orphaned” or bankruptcy remote structures. The key features of STAR trusts for these structures include:

1. Purpose-focused: They can exist solely to fulfil specified purposes, such as holding shares or managing assets.
2. Perpetuity: STAR trusts can exist indefinitely, providing a long-term solution for asset management.
3. No Beneficiary Enforcement Rights: Beneficiaries (if any) cannot enforce the trust unless explicitly granted by the trust deed, leaving enforcement to a designated “enforcer.”
4. Confidentiality: STAR trusts do not require public disclosure of beneficiaries, settlors, or purposes, providing privacy to interested parties.

This flexibility makes STAR trusts particularly well-suited for commercial applications, including employee share incentive schemes as well as holding master insurance policies which is the focus of this article.

Use of STAR Trusts in Employee Benefit Trusts/Schemes

An Employee Benefit Trust (EBT) is a trust established to hold assets for the benefit of employees. EBTs are commonly used for pension plans, stock incentive plans, executive compensation arrangements and other employee-related benefits. These schemes are commonly used to attract and retain talent, particularly in start-ups and fast-growing companies.

The success of such schemes depends on efficient administration and clear governance structures. STAR trusts offer an ideal framework for managing these programmes on the following basis:

1. Defined Purpose for Employee Benefits: STAR trusts can be set up to hold and manage employee benefit schemes for specific purposes, ensuring that funds are used strictly in accordance with the employer’s intentions.
2. Perpetual Structure: Since STAR trusts can last indefinitely, they provide a long-term solution for employee benefits, particularly pension and retirement schemes.
3. Flexibility in Beneficiary Classes: Unlike traditional trusts where individual beneficiaries must be named, STAR trusts allow for a broad class of beneficiaries (e.g. “all employees of XYZ corporation”), providing flexibility in benefit distribution.
4. Protection from Insolvency: Funds held in a STAR trust are generally protected from creditors, ensuring that employee benefits remain secure even if the employer faces financial distress.
5. Independence from Corporate Changes: If the employer undergoes restructuring, mergers, or ownership changes, the STAR trust remains intact, ensuring continuity of employee benefits.
6. Trustee Independence: Using a STAR trust allows an independent trustee to manage the EBT, noting that STAR trusts must have a licensed trust corporation (or its controlled subsidiary) as one of the trustees, ensuring that benefits are distributed fairly and in accordance with the trust deed, rather than being controlled by the employer.
7. Confidentiality: Employee benefits are often sensitive matters, and STAR trusts provide a private, offshore solution with minimal disclosure requirements.

Use of STAR Trusts to Hold Master Insurance Policies

A master insurance policy is a central insurance arrangement that covers multiple subsidiaries, affiliates, or members of an organisation under a single policy. This structure simplifies administration, enhances risk management, and offers cost efficiencies.

Some of the noteworthy reasons that businesses are looking to use Cayman STAR trusts to hold these policies are:

1. Neutral Ownership Vehicle: The STAR trust acts as an independent and neutral holder of the insurance policy, ensuring that the benefits are administered without conflicts of interest.
2. Purpose-Based Trust: Since a STAR trust can be set up to hold assets for a defined purpose, it can be structured to manage and distribute insurance benefits in accordance with pre-defined criteria.
3. Facilitating Multi-Jurisdictional Coverage: Many multinational companies use master insurance policies to cover global operations. A STAR trust, being a Cayman-based structure, provides a neutral offshore jurisdiction to efficiently manage insurance claims and distributions worldwide.
4. Continuity & Stability: Unlike corporate ownership structures, which may be affected by corporate changes, insolvency, or regulatory risks, a STAR trust provides continuity by existing in perpetuity and remaining unaffected by corporate changes.
5. Regulatory & Tax Efficiency: Cayman’s trust laws and tax-neutral environment make STAR trusts an efficient vehicle for administering insurance proceeds while avoiding unnecessary regulatory burdens.

Cayman STAR Trusts

Cayman STAR trusts offer an innovative and highly effective structure for holding master insurance policies and employee benefit trusts/schemes. Their perpetuity, neutrality, asset protection and purpose-driven flexibility make them uniquely suited for these applications.

For multinational corporations, insurers, and businesses looking for a secure, efficient, and long-term solution to manage insurance policies and employee benefits, STAR trusts provide an ideal framework. The ability to hold assets for specific purposes, remain unaffected by corporate changes, and maintain confidentiality makes them a preferred vehicle for companies operating in complex international environments.

With the growing need for structured insurance arrangements and employee benefit programmes, the Cayman STAR trust is an attractive option for organisations seeking stability, efficiency, and long-term asset protection.

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