Companies are owned by shareholders, however there are different entities which can own these shares. Firstly, people can own these shares, as can a parent company. Shares can also be held on trust. In this article, we’ll discuss whether a trust can own shares and how this type of arrangement works.
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Trusts
A Trust is a relationship where one party (the trustee) holds property for the benefit of someone else (the beneficiary). Trusts can exist in a number of ways and for different reasons. Although people often hold shares in companies, other companies and trusts themselves can also be shareholders. A common question that is asked revolves around what property can be held on trust. A trust is a fiduciary relationship. This means that a trustee owns property on behalf of a beneficiary. Beneficiaries can receive property in a number of ways, depending on the terms of the Trust Deed and the trustee. Trusts are not a legal entity themselves, but is a legal relationship.
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Trustee
The trustee is the entity which holds the trust property. There can also be more than one trustee of a trust. Further, the trustee can be a person or a company. In either case, the trustee has to be capable of holding trust property in their own right. Trustees owe the following duties to beneficiaries:
- To preserve trust property
- Acting in good faith
- Loyalty to beneficiaries
- Impartiality
- Keep accurate records and information
Beneficiary
Beneficiaries are those who stand to benefit from the trust. Similar to a trustee, it can be a person or a company. A trustee can also be a beneficiary. However, they cannot be the sole beneficiary of the trust. Beneficiaries pay tax for trust property based on their individual income. Beneficiaries can be under the age of 18 or those lacking capacity to make legal decisions. In this case, a trust can help ensure that someone is taken care of. Beneficiaries, once they receive the trust property, have full legal rights over it.
Discretionary trusts
Discretionary trusts are when the trustee chooses which beneficiaries receive the trust property, and how much of the trust property they get. The discretion is in the trustee having the option of splitting up the trust property however they like.
Unit trusts
Unit trusts are fixed, express trusts. Unlike discretionary trusts, unit trusts allocate the shares in the property for beneficiaries in the trust agreement, rather than discretion by the trustee. Each beneficiary is allocated a unit in the trust property beforehand.
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Company ownership
Ownership of a company is allocated through shares. Shares account for a small percentage of a companies ownership. For example, if you start a company with a friend and you decide to divide ownership equally, you might decide to start your company by having 1000 shares available to be owned. You and your friend will each receive 500 shares, which you can sell. Further, you can arrange it so that a trustee owns the shares in the company.
Can A Trust Own Shares In A Company?
Technically, a trust cannot own shares in a company as it is not a separate legal entity. A trust is simply a relationship. However, this changes when we think about trustees and what they can hold for beneficiaries. Trustees can own many types of property, including liquid cash and property. A trustee can own company shares for the benefit of beneficiaries. For example, if you run your own company, you can set up a trust to hold your shares. If you’re the trustee, you can distribute profits from the trust to yourself. However, as with all trusts, a trustee cannot be the sole beneficiary. This means that you’ll also want to appoint other beneficiaries, such as family members to benefit from the trust.
Example
Collin Wilson is the trustee for the Wilson family trust. He is the director of his own company, ‘Wilson Enterprises Pty Ltd’. Collin wants to distribute some of the company dividends to his adult children, Alex, Madeleine and Nancy. Collin as the trustee, can distribute dividends to them through this structure.
Advantages of holding shares on trust
There are a number of advantages for holding company shares on trust. Although it may seem like a complicated way to structure ownership of your company, the benefits are significant. These include:
Asset Protection
Since the shares are legally owned by the trustee, there is scope for asset protection from third party creditors of beneficiaries. This mean it will be harder for a trustee to mismanage the shares, or act in a way contrary to the beneficiaries’ interests. Trustees need to be careful to ensure that they act in the best interests of beneficiaries and act in good faith.
Tax Planning
Due to the structure of a trust, a trustee can distribute income to the beneficiaries at their discretion.Therefore, if there are multiple beneficiaries, the trustee can select the beneficiary with the lowest marginal rate. This can be used to minimise tax obligations on assets that the trust holds, including company shares.
Ease of Succession
The structure of the trust allows for succession plans to be easily implemented. Control of the trust may be passed on to the next generation without triggering taxes such as capital gains or stamp duty.
Disadvantages
Individuals looking to establish a trust for the purpose of holding shares should be mindful of the potential disadvantages of adopting this approach.
Tax Implications
While there are tax advantages that arise out of using a trust, it does have its limitations. Minors are taxed at the highest marginal rate unless they are genuinely working for a salary. Further to this, any income that the trustee does not distribute by 30 June (the end of the current financial year) is taxed at a penalty rate.
Final Thoughts
The main advantages of holding shares in a trust are the tax benefits and asset protections for the beneficiaries. Overall, these advantages outweigh the disadvantages. A trust can be a great way to manage your finances and property – and this extends to companies.
