William Ahern of Family Capital Conservation looks at some of the main misconceptions around private trust companies, and explains how to overcome these.
Date: Dec 2011
With a captive trust company where Ahern said a “Mum and Dad” sit on the board and the family becomes the shareholder, then the legal robustness of the trust is going to be in question – and viewed as just the alter egos of the Mum and Dad, with this not really being a trust for the beneficiaries but only a nominee arrangement where the Mum and Dad won’t give up any control over the assets.
A potential problem of this, he explained, is that the local tax authority might not view this as a trust, and therefore the assets won’t be considered to be held in trust. In turn, the Mum and Dad will therefore be taxed as if they are the owners of the assets.
Another problem, added Ahern, is if there is a creditor, who then might say that the assets are subject to a claim against the Mum and Dad personally. That could arise from a commercial dispute, or if the Mum and Dad get divorced, and those assets are seen as not really being held in trust but instead as personal assets subject to division as part of the divorce.
For the next generation, if the children are directors of the trust company that holds the family wealth, a divorcing spouse might claim that these assets are actually part of the resources of the child as opposed to being held in trust.
Pitfalls with private trust companies
Another potential issue with a private trust company, said Ahern, arises over the question of who owns it when those people names as the shareholders then die.
For example, if the Mum and Dad set up the private trust company, but then pass away, who do they leave the shares to, asked Ahern.
This might lead to a situation where some of the children take the shares from the Mum and Dad, but the others don’t. This leaves some of them on the board and in control of the trust, with the rest of them – who might also be beneficiaries – not having any control, and therefore potentially leading to conflict, he explained.
Structures to help avoid conflict
Ahern said that to address various pitfalls of private trust companies, some structures exist which involve different entities other than individuals owning the shares.
For example, some people use foundations, some use purpose trusts (for the purpose of holding the shares, not for the beneficiaries), and some use companies by guarantee, to avoid the problem about the succession to the shares and thus ongoing control.
Further, added Ahern, since certain trust companies don’t want to hold “risky” trust assets, they might agree to hold an individual’s financial assets, and then set up and manage for the client a trust company which will look after the riskier assets. This solves the problems of control and introduces a measure of independence to add a legal robustness to the structure.