An overview of Anstalt Foundations, Jersey Sham Trusts, and Cayman Star Trusts: Offshore asset protection vehicles Unveiled

In the complex realm of offshore asset protection and wealth management, offshore structures have emerged as powerful tools for individuals and corporations seeking to safeguard assets, optimize taxation, and maintain control over their wealth. Below we look into three structures which serve three different purposes: Anstalt foundations, Jersey Sham trusts, and Cayman Star trusts.

1) Anstalt Foundations: The European Advantage

Anstalt foundations, also known as 'Establishments,' originate from the principality of Liechtenstein, nestled in the heart of Europe. This structure is a hybrid entity, combining features of both a trust and a company, offering an attractive blend of control and protection.

Set-Up Process:

Anstalt foundations are established by a founder who retains substantial control over the assets. The founder appoints a board of directors to manage the foundation, ensuring their wishes are upheld. This level of control is a distinctive feature of Anstalt foundations. To set up:

• the minimum capital amounts to at least CHF/EUR/USD 30,000 if the establishment is organized similar to a foundation or CHF/EUR/USD 50,000 if the capital is divided into shares.
• The payment can be in cash or with a contribution in kind.
• Usually, the founder instructs a trustee to form an establishment in a fiduciary capacity. The trustee can undertake the formation in his own name to preserve the anonymity of the client.
  

Structure:

The corporate bodies of an establishment are: holder of the founder’s right, board of directors, maybe an audit authority, legal representative, and beneficiaries. The supreme body is/are the holder of founder’s rights, if any, or the board of directors in case of an establishment without founder’s rights. The board of directors is the only mandatory body. The board of directors conducts and manages the company’s business. If the establishment does not carry out economic activities, at least one member of the board of directors must hold a professional trustee’s license. The audit authority is only required if the establishment conducts a business run on commercial lines or if the description of the purpose is included in the articles of association. The legal representative is authorized to receive all communications of the establishment. If neither the articles nor the regulations provide for beneficiaries, the law presumes that the holder of the founder’s rights is the beneficiary. The establishment can be terminated if there is a ground for dissolution (according to articles of association, judgment, law).

Asset Protection and Tax Benefits:

Anstalt foundations are highly effective in protecting assets, especially in the context of succession planning. The founder can specify the conditions under which beneficiaries receive distributions, offering flexibility and security. Liechtenstein's favorable tax regime makes Anstalt foundations an attractive choice for tax optimization. Income generated by the foundation may be subject to lower tax rates compared to other jurisdictions. Establishments are generally subject to unlimited corporate income tax at a flat rate of 12.5%. However, the Liechtenstein tax law provides for several exemptions: Amongst others, dividends and capital gains from the sale of shares are tax exempt, as well as income from real estate and permanent establishments located abroad. Additionally, a notional interest deduction of currently 4% on the company’s equity (after adjustments for tax purposes) is granted. Therefore, the effective tax rate for most establishments is less than 12.5%.

2) Jersey Sham Trusts: Balancing Control and Asset Protection

Jersey Sham trusts offer a unique and powerful approach to asset protection while maintaining the illusion of control. These trusts are distinct from traditional trusts in the sense that they provide the settlor with a level of influence and authority that might not be immediately apparent. This dual nature of Jersey Sham trusts makes them a compelling choice for individuals looking to secure their assets while retaining a degree of control.

Understanding the Sham Trust Concept:

A critical aspect of Jersey Sham trusts is the concept of a "sham." In the context of trusts, a sham refers to a situation where the trust, on the surface, appears to be legitimate and functioning as intended. However, beneath this facade, the reality is quite different. The settlor retains full beneficial entitlement, and there is no genuine intention for the apparent beneficiaries to derive any benefit from the trust.

Types of Sham Trusts:

Within the realm of sham trusts, there are two fundamental categories: total sham trusts and partial sham trusts. Total sham trusts are those where there is no intention on the part of the apparent settlor to transfer legal ownership and control to the trustee. In this scenario, the trust's terms do not accurately represent the true nature of the arrangement.
Partial sham trusts, on the other hand, present a more nuanced situation. In these cases, the apparent settlor genuinely intends to transfer legal ownership to the trustee. However, the underlying objective is for the equitable beneficial ownership to remain solely with the settlor, rather than with the stated beneficiaries. The trustees essentially act as managers and conduits, executing the settlor's directives.
There are also Substantive Partial Sham Trusts in Offshore Jurisdictions, where they are the most commonly encountered in litigation concerning offshore trusts. This distinction is not to say that other types of sham trusts are irrelevant in offshore scenarios, but rather that substantive partial sham trusts tend to be the focus.

The Role of the Settlor in Sham Trusts:

One of the key characteristics of Jersey Sham trusts is the settlor's active involvement. The settlor often maintains a degree of control and influence over the trust, despite conveying the appearance of relinquishing control. This arrangement can provide added protection by obscuring the true ownership of assets. The settlor, in practice, retains a significant level of control while shielding assets from external risks.

Consequences of a Sham Trust Determination:
If a court determines that a trust is a sham, significant consequences may follow. Typically, the trust is rendered void, and neither the settlor nor the trustee can rely on the trust deed as representing the true position regarding the rights and obligations between the parties. Trustees may also face potential tax penalties, and the indemnities that typically protect them could be lost.

Proving a Sham: Indicators and Evidence:

Evidence of a sham trust can be established through various indicators. One key indicator is the unilateral control of trust property vested in the settlor, with trustees failing to exercise independent discretion or act consistently with the terms of the trust deed. In addition, trustees may display reckless indifference if they fail to confirm the valid source of property or ensure that they become the legal owners of property transferred to them by the settlor.
However, it is important to note that trustees may not always have full control of trust assets, especially if the settlor has statutory reserved powers. While the mere reservation of such powers does not necessarily prove a sham, a preponderance of reserved powers can strengthen the argument that the trust terms were structured to show the trustee having possession of trust property, even though the settlor retains de facto legal ownership or sole equitable beneficial ownership.

Minimizing the Appearance of a Sham Trust:
Trustees can take steps to minimize the potential for their trust to be labeled a sham. Maintaining credible evidence of the trust's legitimate nature is crucial. The best evidence often comes from contemporary trust records. Trustees should maintain detailed minutes demonstrating their independent consideration of matters and the absence of improper influences from the settlor.

3) Cayman Star Trusts: Striking a Balance

In 1997, the Cayman Islands introduced a groundbreaking form of non-charitable purpose trust legislation, known as the "Special Trusts (Alternative Regime) Law," or STAR Law. Today, it is consolidated within the Trusts Act (2021 Revision) under Part VIII. STAR Trusts have gained popularity due to their unique ability to balance control and asset protection. It introduces a new dimension to the world of asset protection and trusts. These trusts offer an innovative approach to crafting customized and versatile structures that adapt to specific needs and purposes.

The STAR Trust Concept and particular features:

Traditional trusts are vital in legal contexts such as wealth planning, pensions, philanthropy, investment funds, and commercial applications. However, these traditional trust structures come with inherent limitations, especially regarding the allocation of information and enforcement rights. The STAR Regime steps in to eliminate many of these constraints. STAR Trusts are chosen when specific features are required, making them exceptionally advantageous in a variety of scenarios:

i) Financing Transactions: STAR Trusts can replace charitable trusts for holding shares in special purpose vehicles, making it possible to keep assets off the balance sheet and create bankruptcy remote structures.
ii) Managing Mutual Funds: STAR Trusts often hold management shares of mutual funds, ensuring that control remains in a tax-neutral jurisdiction, shielded from investor influence.
iii) Special Purpose Acquisition Companies (SPACs): STAR Trusts are seamlessly integrated into SPAC structures, providing essential investor protection provisions, including the management of IPO proceeds, limiting fund usage, and safeguarding investments.
iv) IPOs: Founders and substantial shareholders use pre-IPO family discretionary STAR Trusts for wealth succession planning, asset protection, and stability throughout the IPO process, mitigating potential adverse events.
v) Family Business Succession: STAR Trusts serve as effective vehicles for securing family business succession, ensuring ownership and management stability for future generations.
vi) Philanthropic Trusts: STAR Trusts act as alternatives to charitable trusts when non-charitable elements or philanthropic objectives don't fit within traditional Cayman law. They also grant settlors control over trust enforcement.

The inclusion of such features in traditional trusts would be difficult or impossible, underscoring the flexibility of the STAR Regime.

Technical Requirements, Roles and Rights of the Enforcer:

Creating a STAR Trust requires an express written declaration stating that the STAR Regime applies. While there are some variations, the majority of the law aligns with traditional trust principles.

STAR Trusts differ from regular trusts in that they require one or more enforcers, individuals exclusively authorized to enforce the trust. Enforcers can be appointed by the settlor or the court, holding rights and remedies akin to beneficiaries, including the ability to seek court direction and access information about trust administration. Like all trusts, STAR Trusts need trustees. At least one trustee must qualify as a 'trust corporation' under Cayman law. The court can make exceptions to this requirement. In practice, non-qualifying trustees can co-trustee, provided that a trust corporation is among them.

Non-charitable purposes in STAR Trusts must adhere to public policy and Cayman law. Any uncertainties can be resolved through the trust's terms or the intervention of the court. STAR Trusts are also restricted and cannot directly or indirectly own land in the Cayman Islands. However, they can possess interests in entities that hold land for business purposes.

Practical Uses of STAR Trusts:
STAR Trusts have found favor in various scenarios, some examples include:

Creating special purpose vehicles for asset management,
Establishing private trust companies,
Limiting trustee involvement in operating companies,
Safeguarding trust funds from disputes,
Supporting social benefit projects,
Recognition Outside of the Cayman Islands,
STAR Trusts are generally recognized as valid trusts in countries that have adopted The Hague Convention.

Conclusion

The STAR Regime offers a level of flexibility, especially in trusts with non-charitable purposes and unique enforcement/information rights, making STAR Trusts a crucial component in offshore transactions and arrangements for years to come. STAR Trusts stand as a testament to the Cayman Islands' ability to continually innovate and offer solutions that meet the evolving needs of the global financial landscape.

In the world of offshore asset protection, the choice between Anstalt foundations, Jersey Sham trusts, and Cayman Star trusts ultimately depends on your unique financial goals and preferences. Each structure offers distinct advantages, from the control and flexibility of Anstalt foundations to the illusion of control and protection of Jersey Sham trusts, and the balanced approach of Cayman Star trusts.

When considering these offshore entities, consulting with legal and financial experts is crucial to ensure compliance with local regulations and international standards. Whether your objective is to protect assets, optimize taxation, or maintain control over your wealth, these offshore structures provide powerful tools for achieving your financial goals in a globalized world.