The Trust as a Family Holding Structure

Part II: Various aspects of the trust as a Family Holding Structure

A trust can provide a very good solution for the long term holding and preservation of family wealth. Trusts have been used for generations for the holding and preservation of family wealth.  A trust can arise in several ways, but the most usual in the context of family wealth is either by virtue of the lifetime act of an individual, or by virtue of provisions left by an individual under his will, and so coming into effect upon his death. In Part I of this contribution general aspects of trusts have been reviewed. Now we look in Part II at more specific aspects of what it takes to create a trust as a successful Family Holding Structure

1.             Family office

Trustees in many cases effectively function as a family office, looking after the family’s wealth, and being involved in many aspects of the lives of the family members.  A professional trustee will very likely have its own internal capacity to provide many additional levels of service beyond pure trusteeship as such.  Alternatively, trustees may choose to use outside service providers for different aspects, or they may seek to establish a family office company which they hold as part of the trust assets.  Such a family office company can be self standing with its own management and employees, remunerated by fees charged to the various entities to which it provides its services.  The advantage of the trust structure is that there is a trustee who is ultimately responsible for all aspects encompassed by the trust, and subject to the trustee operating properly in accordance with the governing trust instrument, decisions ultimately lie with the trustee which can help to minimise disputes and disagreements.  It does not mean that disputes and disagreements at family level will not arise, but a third party decision maker can often take the heat out of disputes and disagreements.

2.             Privacy

Wealth is a privilege for those lucky enough to enjoy it, but it also brings burdens of varying degree and in various contexts.  While professional trustees in most places have to be regulated for prudential purposes, it is generally the case that details of particular trusts, their assets and beneficiaries remain matters that are private unlike, for example, in the case of companies where annual filings, including accounts, have become the norm.  A particularly important point in this context is that where assets are put into trust during an individual’s lifetime, they will not need to go through the probate process at his death.  The probate procedure in most places involves an element of public information, generally including the terms of the will, and the value of assets covered by the grant of representation to the estate.  Using a trust may be able to assist in maintaining personal, commercial and financial security for a family and its businesses and other assets.

3.             Claims by creditors and others

A trust may be of assistance against claims made against an individual by creditors and others, certainly against speculative claims which are essentially founded only in their nuisance value against a wealthy individual.  This can include matrimonial and heirship claims, but as these are generally referable to statutory entitlements, the statute will generally override the ability, whether wholly or partly, to defeat such claims by putting assets in trust.  Cross border claims can bring their own issues in the sense of whether the courts of a country will strike down a trust which was legitimately created under its law, by reference to a matrimonial or heirship claim under the law of another country.  While the position of the settlor of a trust is sometimes exposed in this manner, the position of the beneficiaries should generally be better.  As a beneficiary of a discretionary trust does not have any actual immediate interest in any trust assets, those assets cannot be actioned in respect of the beneficiary’s liabilities.  The most that might occur would be for a court to make an assumption in matrimonial proceedings, for example, that a beneficiary had a reasonable expectation of receiving benefits from the trust, and hence the assets might be notionally brought into account in the division of the individual’s own assets as between that beneficiary and the spouse of that beneficiary.

4.             Beneficiaries

A trust exists for the benefit of the beneficiaries, but this does not mean that it must be divided up amongst the family members in the short term.  The maintenance of family wealth is generally a long term aspiration for the benefit of the current and also future generations of the family concerned.  This can enable the trustees to consider a policy suited to the nature of the trust assets, and the divergent competencies and characteristics of the beneficiaries from time to time. This is easier to deal with where the trust assets are comprised of portfolio type investments.  The trustees in such circumstances have to manage a large pot of value and consider the manner in which it should be used to provide benefits to the beneficiaries.  It is obviously much more difficult to manage where the principal asset comprises an operating group of companies.  There will be tensions at beneficiary level between beneficiaries who might wish to manage some of the businesses and reap rewards in terms of ownership, and beneficiaries who feel they should be able to receive value from the trust, whether to establish alternative businesses or to engage in laudable, but less remunerative activities such as the arts of philanthropy.  This is where competent professional trustees will need to draw on their experience, and to use their skills to reconcile such tensions.

5.             Philanthropy

A trust can cater for a family’s philanthropic aspirations by including charities as potential beneficiaries.  Settlor guidance on the nature of those aspirations will assist trustees in this context, or guidance from time to time from representatives of the main family branches.  Where the circumstances warrant it, the trustees may see fit to establish a separate charitable fund as a carve out from the main trust fund to facilitate separate management in order to focus on the specific charitable areas which they desire to benefit.

6.             Conflicts of interest

Much of a trustee’s job is determining and balancing the conflicting interests of beneficiaries.  Inevitably, on occasions, some beneficiaries will consider themselves losers in such conflicts, but provided the trustees have acted in accordance with the governing trust instrument and have properly considered all relevant matters, and not any that are not relevant, they should not be exposed to any sanction in respect of their decisions. The position is very different where trustees may find themselves exposed to a personal conflict of interest with regard to their position as trustee.  Trustees must act for the benefit of the beneficiaries, and except for matters specifically permitted under the governing trust instrument, such as entitlement to remuneration for their trustee services, must endeavour to ensure that conflicts of interest do not arise.  If a conflict of interest should arise, any loss to the trust fund occurring in consequence may be considered to be due to a breach of trust, in respect of which the trustee will be required to make good the loss to the trust fund.  On the other hand, if a benefit should occur to the trust fund in course of a trustee conflict of interest, the trustee has no inherent entitlement to any additional remuneration as a result.

7.             Trustee charges

As a relic of former times, trustees are generally not permitted to profit from their trusteeship unless appropriately authorised to do so by their trust instrument.  Professional trustees are obviously not going to act without being able to charge their normal fees and so trust instruments invariably contain authorisation for trustee to be paid their normal level of fees.

8.             Trustee Indemnity

Trustees have a general indemnity under law in respect of expenses incurred in the exercise of their trusts and powers, and they are entitled to pay or discharge such expenses out of the trust assets.  This will invariably be extended by more specific terms in trust instruments clarifying that trustee liability will be confined to loss caused by trustee’s wilful misconduct or wilful breach of trust.  This is necessary to enable trustees to act honestly and properly in circumstances which may result in certain beneficiaries feeling aggrieved.  Trustees indemnity clauses which seek to exculpate trustees for loss to the trust fund due to their negligence are generally unlikely to be upheld.