Trusts versus holding companies for families

What each structure does

A family holding company is a company whose shares are held by family members and which in turn owns the operating businesses and investments. It centralises control through the board, allows share classes that separate votes from economics, and makes dividends, buy-backs and admission of new owners mechanical. It does not, by itself, deal with death: shares pass under wills and intestacy rules, through probate, in each family member's jurisdiction.

A trust is a relationship, not a company: a settlor transfers assets (often the shares in the holding company) to a trustee, who holds them for beneficiaries under the terms of a trust deed, usually with a protector who can replace the trustee. The trustee is the legal owner; the beneficiaries have rights to benefit as the deed provides. A discretionary trust lets the trustee decide who receives what and when, within the class of beneficiaries and guided by the settlor's letter of wishes. Because the shares are owned by the trustee, they do not form part of any beneficiary's estate and pass without probate.

Which jurisdictions recognise private trusts

Singapore, Hong Kong, the United States, Canada, Australia, New Zealand and the United Kingdom are common law jurisdictions with mature trust law and professional trustees; Singapore and Hong Kong also license trust companies and offer private trust company regimes. Malta, a civil law jurisdiction, enacted the Trusts and Trustees Act and recognises trusts alongside foundations, and Maltese trustees are licensed by the Malta Financial Services Authority. Japan and Taiwan have trust statutes (Japan's Trust Act, Taiwan's Trust Act) but family discretionary trusts are rare and the tax treatment is uncertain, so families there typically hold through a company with a trust in another jurisdiction above it, if at all. LegalMatrix's family holding and trust documents product includes a trust deed in the eight jurisdictions that recognise private trusts and a holding-company-only set for Japan and Taiwan.

Holding company alone

A holding company suits families who want control mechanics and a single dividend channel but are content for shares to pass by inheritance. The shareholders' agreement and constitution do the work: share classes, transfer rules, compulsory transfer on death with a buy-back funded by the company or insurance, family employment rules and dispute resolution. The limitations are probate (delay and publicity on each death, in each jurisdiction where a family member is domiciled), forced heirship in civil law jurisdictions and for some nationalities, incapacity (a shareholder who loses capacity needs a court-appointed representative to vote), and the inability to benefit people who are not shareholders without giving them shares.

Trust above the holding company

Placing the holding company's shares in a discretionary trust solves those limitations. Succession happens under the deed, without probate, and can be staged by the trustee as the next generation matures. Incapacity of a family member does not affect the shares. Beneficiaries can include spouses, grandchildren and charities without making them shareholders. A protector, often a trusted adviser or a family committee, supervises the trustee. The costs are real: a licensed trustee's fees, loss of direct legal ownership (the family must trust the trustee and the deed), reporting of the trust to beneficial ownership registers where the law requires (all ten jurisdictions require disclosure of controlling persons in some form), and tax rules on settlements, distributions and deemed dispositions that differ sharply between the settlor's and beneficiaries' countries. Families with members in the United States, Canada, the United Kingdom, Japan or Australia need their tax advisers in the room before a trust is settled.

Foundations and private trust companies

Two variants appear often. A private trust company is a company owned by the family (or by a purpose trust) that acts as trustee of the family trust, giving the family a seat at the trustee's table while keeping the trust structure; Singapore, Hong Kong and Malta accommodate it. A foundation, available in Malta and in several other civil law jurisdictions, is a legal person with no shareholders that holds assets for a purpose or beneficiaries, and appeals to families from civil law countries who find the trust concept unfamiliar. Both are documented in the same way as a trust, with a constitution or charter in place of a deed.

Whichever vehicle is chosen, the governance documents around it matter as much as the deed. A letter of wishes tells the trustee how the settlor would like discretion exercised and can be updated without amending the trust; it is not binding but trustees follow it unless there is good reason not to. The protector's powers should be listed exhaustively (removal and appointment of trustees, consent to distributions above a threshold, consent to adding or excluding beneficiaries) so that the protector cannot be treated as a shadow trustee. And the family charter should state how family members interact with the trustee, so that requests for distributions go through a process rather than through whoever is most persistent.

Choosing, in practice

The LegalMatrix family holding and trust documents product delivers the constitution, shareholders' agreement, trust deed, family charter and appointment documents as one matched set, signed off by a lawyer admitted in the jurisdiction, with the family's tax advisers confirming the tax position and GoGoTrust administering the holding company and, where engaged, acting as or arranging the trustee.