Trusts and family businesses Are trusts always the best succession solution for a family and how can you ensure your trust is fit for purpose? All too often we encounter the use of trusts where families are not quite sure why they were created and how they should be operated. We’ve shared some thoughts below on why trusts can be beneficial but also problematic.
7. If businesses qualify for the relevant inheritance and capital gains tax reliefs applicable to businesses, then it may be possible to transfer shares into trust without initial tax costs, which can make a trust a much more viable structuring option. 8. However, once the business is sold or no longer qualifies for these reliefs, then the trust fund will become subject to tax. Some may see such tax costs as viable costs to incur given the broader benefits, but this needs to be considered and modelled from the outset. If a trust is being advocated to you, then it’s important to make sure you understand its purpose, you feel it meets your broad objectives and you approach the design and operation with a long-term outlook, taking account of your family dynamics and family culture.
1. Trusts consolidate ownership of the shares in the hands of the trustees and avoid shares becoming owned directly by multiple family members – this ensures control is centralised in the hands of the trustees, who then have to make decisions in the best interest of the beneficiaries. 2. As a consequence, you need to have people as trustees that i) the family trust ii) is up to the job of being a trustee iii) will ensure that the trust is properly run with good governance in place. The trust and the trustees should not be viewed in a passive light. 3. The shares do not belong to any one person – they are legally owned by the trustees. This can potentially protect the shares from subsequent asset protection risks such as divorce or creditor claims. 4. However, for a trust to provide such protection, it needs to be well run with decisions being made by the trustees on a sufficiently independent and well-informed basis. This may mean that the trustees will on occasion make decisions that not everyone agrees with! 5. Creating a trust that is well-run will change the dynamic of the shareholding structure – it may be that shareholder decisions cannot be made as quickly, and there is greater oversight and accountability as a consequence of the trustee’s involvement. 6. Trusts have been used as structuring solutions for family businesses for many years. But helping a family retain an emotional connection, and sense of responsibility to a family business where it is held in a trust for so long, may be more challenging and this needs to be borne in mind.
Clare Stirzaker Partner, Boodle Hatfield LLP
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