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. 

Part I: General introduction of the trust as family holding

It can sometimes be difficult to explain what a trust is, but at risk of oversimplification, a trust can be described as being the situation which arises where an owner of property causes that property, either by lifetime transfer, or by virtue of provisions under his will, to be transferred to persons, known as trustees, to hold for the benefit of other persons, known as beneficiaries.  The trustees generally hold the legal title to the trust property, but the beneficial entitlement, or the beneficial interest, lies with the beneficiaries.  The beneficiaries are entitled to require the trustees to perform their trusteeship according to the governing instrument, usually either an inter vivos trust deed or a will.  They need not themselves have been a party to the establishment of the trust.  Trustee, on the other hand, hold a position of considerable responsibility.  Two of the traditional tenets of trusteeship are that a trustee may not profit from his trusteeship unless authorised to do so, because all profits belong to the beneficiaries, and a trustee may not delegate his responsibilities as trustee to someone else, again unless specifically authorised to do so.  Thankfully, modern trust instruments are invariably drafted to include the capacity for trustees to be paid for acting as trustees, and for appropriate levels of delegation to be done to enable trustees to function efficiently in the modern world.

The identity of the beneficiaries of the trust, and their respective interests, can be fixed at the outset, or alternatively they can be determined as an identifiable group such as the descendants of a person, with the question of allocation of assets or benefits amongst those beneficiaries being left to the trustees, although generally with some background guidance provided by the settlor or testator in a letter of wishes.  Such latter type of trusts are generally described as discretionary trusts, as opposed to the former type of trusts which are described as fixed interest trusts.  Where a settlor or testator is concerned with long term holding and preservation of family wealth, it is inevitably a discretionary trust which is used because it provides the opportunity to cater for future events and circumstances as they arise and develop and avoids the requirement of having to decide in advance on how family wealth should proceed down the generations.

Planning for family wealth preservation down the generations, and particularly where it is inevitably going to be a multi jurisdictional matter, is always going to throw up particular problems which have to be dealt with in their particular circumstances.  Trusts can provide solutions under several different headings.

1.             Choice of trustees

It is self evident that the choice of a trustee to handle substantial family wealth, and particularly so where this involves an operational business, is an important aspect.  It is invariably going to involve a professional trustee, often a financial institution.  Reputation and competence are paramount.  An individual considering the selection of a trustee will generally wish to become familiar with the candidate under consideration.  This can be an extremely valuable process in terms of ensuring that the trustee has a good background knowledge of the family and of the assets to be placed in trust.  It also enables the introduction of the existing family advisers to the trustee to allow for a smooth transition to the trusteeship once it has been established.

2.             Settlor control

Successful individuals with wealth created by themselves often find it difficult to consider transferring that wealth to trustees and ceding control over it, all the more so where the wealth continues to be represented by a successful group of operating companies.  At its most extreme, this can lead to the realisation that it may not be appropriate for such an individual to consider making a lifetime trust, but rather should be covered in terms of a will to become operative on death following which the individual’s capacity to control is inevitably curtailed.  Alternatively, a measure of control can be retained by the individual through retaining a direct shareholding in one or more group companies giving either positive control, or maybe some specific negative sanction.  This can also be achieved through the mechanism of the terms of the trust itself by requiring the trustees in certain circumstances to seek the consent of the settlor for certain specified transactions.  However, it is important that any settlor control retained in respect of trustees’ actions or decisions should be limited to particular aspects only, because too much retained control can result in claims that there is no real trust at all.  Such claims may arise in the areas of taxation, or creditors or succession, and possibly frustrate the overall intention behind the making of the trust in the first place.