The usefulness of trusts in commercial transactions
Trusts are often associated with private wealth, but they can also be very useful in commercial transactions.
In practice, of course, we have all came across them in investment contexts, where they are unit trusts, and in pensions, where they are either the structure for the pension fund itself or employee benefit trusts which act as holding vehicles for shares and cash. In major financing transactions they can be used to hold security on behalf of syndicates of lenders; in joint ventures or companies with different categories of co-operating shareholders, they can be used to hold the votes attached to shares to ensure that agreed corporate strategies are adhered to by the joint venture company.
Trusts require three “legal certainties” to be established and in a commercial context, these are unlikely to be difficult. First, the party providing the assets for the trust must show a clear intention to establish a trust. Secondly, it must be clear what assets are subject to the trust. Finally, it must be clear who is meant to benefit from it. These will almost always be established by a trust document in a commercial context.
The key advantages of using trusts include the following:
- The assets of the trust fund are clearly segregated from the assets of the entity which established it, and from the entity which holds them. This means that those assets are set free from the fate of the settlor if, for example, it becomes insolvent, or it is acquired by a third party in the future.
- They are flexible. The provisions of the trust can be agreed between the settlor and the trustee (and in practice whatever is proposed by the settlor is likely to be implemented). This is in contrast to most other commercial vehicles whose structure and management is to a much greater extent controlled by legislation and regulation. A trust can therefore be established with very few formalities.
- In a commercial context, where a trust is established by a company, there will be no charge to inheritance tax (as essentially the periodic inheritance tax charges only apply to property held within a settlement, that is a succession of interests). It is usually possible therefore to establish a structure which is ‘tax transparent’, i.e. any tax consequences reflect the tax status of the beneficiaries and not the trust as a separate legal entity.
- The creation of a trust and its operation can be kept confidential as there are no public filing requirements in the UK (although the European Union is trying to end confidentiality in this area to a large degree, so watch this space).
The key message is that there is no fundamental division between trusts and the corporate world, and trusts can have useful and varied roles to play in complex corporate and commercial transactions.