The Trust as a Family Holding Structure 

The Trust as a Family Holding Structure 

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. 

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.

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.

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.

Trust as a Family Holding Structure

Trust as a Family Holding Structure

Various aspects of the trust as a Family Holding Structure

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. In Part I of this contribution general aspects of trusts have been reviewed. Now we look in Part II at more specific aspects of what it takes to create a trust as a successful Family Holding Structure

Family office

Trustees in many cases effectively function as a family office, looking after the family’s wealth, and being involved in many aspects of the lives of the family members.  A professional trustee will very likely have its own internal capacity to provide many additional levels of service beyond pure trusteeship as such.  Alternatively, trustees may choose to use outside service providers for different aspects, or they may seek to establish a family office company which they hold as part of the trust assets.  Such a family office company can be self standing with its own management and employees, remunerated by fees charged to the various entities to which it provides its services.  The advantage of the trust structure is that there is a trustee who is ultimately responsible for all aspects encompassed by the trust, and subject to the trustee operating properly in accordance with the governing trust instrument, decisions ultimately lie with the trustee which can help to minimise disputes and disagreements.  It does not mean that disputes and disagreements at family level will not arise, but a third party decision maker can often take the heat out of disputes and disagreements.


Wealth is a privilege for those lucky enough to enjoy it, but it also brings burdens of varying degree and in various contexts.  While professional trustees in most places have to be regulated for prudential purposes, it is generally the case that details of particular trusts, their assets and beneficiaries remain matters that are private unlike, for example, in the case of companies where annual filings, including accounts, have become the norm.  A particularly important point in this context is that where assets are put into trust during an individual’s lifetime, they will not need to go through the probate process at his death.  The probate procedure in most places involves an element of public information, generally including the terms of the will, and the value of assets covered by the grant of representation to the estate.  Using a trust may be able to assist in maintaining personal, commercial and financial security for a family and its businesses and other assets.

Claims by creditors and others

A trust may be of assistance against claims made against an individual by creditors and others, certainly against speculative claims which are essentially founded only in their nuisance value against a wealthy individual.  This can include matrimonial and heirship claims, but as these are generally referable to statutory entitlements, the statute will generally override the ability, whether wholly or partly, to defeat such claims by putting assets in trust.  Cross border claims can bring their own issues in the sense of whether the courts of a country will strike down a trust which was legitimately created under its law, by reference to a matrimonial or heirship claim under the law of another country.  While the position of the settlor of a trust is sometimes exposed in this manner, the position of the beneficiaries should generally be better.  As a beneficiary of a discretionary trust does not have any actual immediate interest in any trust assets, those assets cannot be actioned in respect of the beneficiary’s liabilities.  The most that might occur would be for a court to make an assumption in matrimonial proceedings, for example, that a beneficiary had a reasonable expectation of receiving benefits from the trust, and hence the assets might be notionally brought into account in the division of the individual’s own assets as between that beneficiary and the spouse of that beneficiary.


A trust exists for the benefit of the beneficiaries, but this does not mean that it must be divided up amongst the family members in the short term.  The maintenance of family wealth is generally a long term aspiration for the benefit of the current and also future generations of the family concerned.  This can enable the trustees to consider a policy suited to the nature of the trust assets, and the divergent competencies and characteristics of the beneficiaries from time to time. This is easier to deal with where the trust assets are comprised of portfolio type investments.  The trustees in such circumstances have to manage a large pot of value and consider the manner in which it should be used to provide benefits to the beneficiaries.  It is obviously much more difficult to manage where the principal asset comprises an operating group of companies.  There will be tensions at beneficiary level between beneficiaries who might wish to manage some of the businesses and reap rewards in terms of ownership, and beneficiaries who feel they should be able to receive value from the trust, whether to establish alternative businesses or to engage in laudable, but less remunerative activities such as the arts of philanthropy.  This is where competent professional trustees will need to draw on their experience, and to use their skills to reconcile such tensions.


A trust can cater for a family’s philanthropic aspirations by including charities as potential beneficiaries.  Settlor guidance on the nature of those aspirations will assist trustees in this context, or guidance from time to time from representatives of the main family branches.  Where the circumstances warrant it, the trustees may see fit to establish a separate charitable fund as a carve out from the main trust fund to facilitate separate management in order to focus on the specific charitable areas which they desire to benefit.

Conflicts of interest

Much of a trustee’s job is determining and balancing the conflicting interests of beneficiaries.  Inevitably, on occasions, some beneficiaries will consider themselves losers in such conflicts, but provided the trustees have acted in accordance with the governing trust instrument and have properly considered all relevant matters, and not any that are not relevant, they should not be exposed to any sanction in respect of their decisions. The position is very different where trustees may find themselves exposed to a personal conflict of interest with regard to their position as trustee.  Trustees must act for the benefit of the beneficiaries, and except for matters specifically permitted under the governing trust instrument, such as entitlement to remuneration for their trustee services, must endeavour to ensure that conflicts of interest do not arise.  If a conflict of interest should arise, any loss to the trust fund occurring in consequence may be considered to be due to a breach of trust, in respect of which the trustee will be required to make good the loss to the trust fund.  On the other hand, if a benefit should occur to the trust fund in course of a trustee conflict of interest, the trustee has no inherent entitlement to any additional remuneration as a result.

Trustee charges

As a relic of former times, trustees are generally not permitted to profit from their trusteeship unless appropriately authorised to do so by their trust instrument.  Professional trustees are obviously not going to act without being able to charge their normal fees and so trust instruments invariably contain authorisation for trustee to be paid their normal level of fees.

Trustee Indemnity

Trustees have a general indemnity under law in respect of expenses incurred in the exercise of their trusts and powers, and they are entitled to pay or discharge such expenses out of the trust assets.  This will invariably be extended by more specific terms in trust instruments clarifying that trustee liability will be confined to loss caused by trustee’s wilful misconduct or wilful breach of trust.  This is necessary to enable trustees to act honestly and properly in circumstances which may result in certain beneficiaries feeling aggrieved.  Trustees indemnity clauses which seek to exculpate trustees for loss to the trust fund due to their negligence are generally unlikely to be upheld.

Charities, philanthropy, education and family offices

Charities, philanthropy, education and family offices

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. This article includes “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Charities, philanthropy, education, family offices and good Family Governance

  • Family Charities and Philanthropy. Many families are involved in charities that are important to the family. Sometimes these are areas of concern that pull the family together; sometimes these are actual operating family charities. These can also be included in a Family Constitution. Some examples include:
    • Agreeing on annual grants from the family charity to direct needs
    • Creating and supporting an orphanage, a business school, a mosque, etc.
    • Working through “RFP”s (request for proposals) to ask direct charities what they would do if they received a grant of a specific amount.
    • Creating a “younger generation” group that would be authorized to agree on and distribute a certain amount each year.
    • Include an investment committee that would provide oversight to ensure that the investment funds being held for charity would include restrictions on the permitted investments that would be aligned with the family’s values.
  • Family Education Oversight. In looking ahead to the future many families decide that the quality of education of all of the young family members will be a critical factor in the long-term success of the family. Those families have included in the Family Constitution an obligation to oversee the education of all family members. Some create specific education modules that are designed to make the younger family members future owners with a strong knowledge base in the areas of concern to the family (this could be only investment skills or could include an understanding of the family business.)
  • Creation and Operation of one or more Offshore Trusts. Many families decide that they want to separate out some “safety” amount of the family wealth to set aside for any unforeseen needs of the family. A trust is often the ideal arrangement to use, and to diversify any economic or political risks, these trusts are usually set up in an off-shore jurisdiction. The terms of the trust can usually be written to cover any of the specific needs the family wants to provide for. For example, many families are concerned about potential uninsured catastrophic health care costs. Sometimes the trust is to be available for starting a business or buying a home.
  • Creation of a Private Trust Company. Whenever a family has a substantial number of trusts the issue of selecting the right trustee (or trustees) is often difficult. Several states in the United States have passed very friendly laws for families to create their own trust companies. Those trust companies can then serve as trustee of the family trusts (and the family owns the trust company.) In some cases the family trust company will partner with a large institution to provide the back office administrative and regulatory services. Several off-shore jurisdictions also have laws that welcome private trust companies.
  • Establishing and Operating a Private Family Office. When a family decides it has needs that justify hiring dedicated staff employees to serve those needs, it often decides to create its own “family office.” The provisions about the family office would be very much tailored to the needs of the individual family. They might include:
    • Individual budget reviews
    • Payment of all bills
    • Hiring and supervising household staff
    • Maintaining additional homes, yachts, aircraft, etc.
    • Curating any special collections
    • Obtaining appropriate risk coverage
    • Putting in place emergency provisions (including kidnap protocols)
    • Coordinating trusts and wills
    • Overseeing the operation of any family charities
    • Ensuring that appropriate tax planning is always in place
    • Overseeing the investment of liquid portfolios (in some cases this is the only function of the family office, in which case they are more accurately referred to as private investment firms.)
  • Family Venture Funds Most families received the family wealth historically from an entrepreneurial business venture. With a concerned eye on the negative “shirtsleeves to shirtsleeves in three generations” proverb, many families are working proactively to instill and encourage that original entrepreneurial spirit. One way to do that is to create a Family Venture Fund, which might include the following:
    • A fund from the family wealth is set aside to be used for new entrepreneurial projects.
    • A family member would present a proposal, with a complete business plan, to the committee in charge of approving proposals.
    • The approval committee could include a non-family member with experience in the particular field involved in a proposal.
    • The committee could require a pay-back schedule.
    • The funding could be as an ownership investment, a loan, or a gift.
    • If it is funded as an ownership interest, the family will have one more common asset to tie them together.
    • On-going monitoring is usually included (part of “accountability”).
  • Annual Family Gatherings. Finally, for the family to stay strong and connected to each other, they need to be with each other. Most families who work on family governance include a provision for annual gatherings. The annual gatherings can include:
    • Celebrations of family milestones (anniversaries, graduations, public recognition, etc.)
    • Fun team-building activities (river rafting, mountain climbing, camping, group cooking, fishing, etc.)
    • Educational programs, about the family business or investment topics or professional skills building
    • Reports on the operation of the family business, family investments and any family charities.
    • Family stories and family history presentations
    • Creation of a family history book
    • Talent shows by family members

How can family a succeed?

• By creating a tailored family governance system.
• Family governance can take many forms—go ahead and be creative.
• The key is to include and respect all family members in creating a system for family decisions.
• With “transparency”, “accountability” and “participation” a family’s governance system should result in multi-generational success and continuation. (end of 4th article?)

Which opportunities do social businesses offer for venture philanthropy funds?

Which opportunities do social businesses offer for venture philanthropy funds?

The innovative, market-oriented but yet not yield-oriented model of social businesses makes a good match for the distinctive approach of venture philanthropy funds.

The term social business was coined by the Nobel Peace Prize laureate Muhammad Yunus. He founded the Grameen Bank, a community development bank in Bangladesh, which awarded microloans for micro-entrepreneurs and enterprises. Today, social businesses like the Grameen Bank represent 10% of all European businesses with over 11 million paid employees, according to the European Commission. It is therefore an important and growing sector in Europe.


The nature of a social business

The purpose of a social business is not to maximize profits but to solve social and environmental problems. In contrast to non-profit organizations, a social business is financially self-sustainable and not dependent upon donations. Whereas a non-profit organization is tax exempt, a social business is taxed like every other similar organization. If a social business realises profits, the profits are not distributed as dividends, but they are reinvested in the business itself or in other social businesses. The investors or owners of a social business can recoup their investment after a period of time, but they do not earn anything. Rather than for profits, those investors act philanthropically.

The initiative for a social business can be generally traced to a social entrepreneur who is the initiator and the face of the business. Spinoffs from non-profit organizations or for-profit companies are also possible. In general, social businesses have an innovative business model.


Venture philanthropy as a driving force behind a social business

One possible source of funds for a social business is venture philanthropy. Venture philanthropy investments are similar to venture capital investments. They differ, however, insofar as that an investor in venture capital is profit-oriented, whereas an investment in venture philanthropy aims for the biggest social impact.

A venture philanthropy fund provides financial and non-financial support to social businesses.  Most commonly it is less about financing specific projects, but more about setting up the business. That is why venture philanthropy investments frequently help younger businesses to establish a structure and a network, to provide training for staff and to develop a strategy and a marketing concept.

Depending on the concept of the fund, the investor can get involved beyond his or her ordinary financial contribution. To ensure the success of the investment, the results are constantly analysed. For control purposes, a target agreement between the social business and the investing fund is an option.

The partnership may be limited in time, i.e. that the fund retires after a specified period. In order to avoid damage to the supported business, however, such a withdrawal should be carefully planned.


The targets of venture philanthropy funds

The targets of a venture philanthropy fund may be both non-profit organizations and social businesses which are engaged in non-economic activities (e.g. environmental, educational or social) without being considered as non-profit for tax purposes.

Examples of venture philanthropy funds in Europe are BonVenture in Germany, Ashoka in the United Kingdom or Fondazione Oltre Onlus in Italy. The European Venture Philanthropy Association (EVPA) aims to support networking among the protagonists.

The Regulation (EU) No 346/2013 of 17 April 2013 on European Social Entrepreneurship Funds sets out a new label for funds which focus on investments in European social businesses. In order to be labelled as a European Social Entrepreneurship Fund, a fund has to prove that at least 70% of the capital received from investors are invested in social businesses. This shall assist potential investors in the identification of funds appropriate for their purposes.


Foundations and venture philanthropy

Foundations are also able to pursue venture philanthropy. A foundation is not limited to the passive role of a donor, but it can play an active role by sharing its know-how and network with the organizations it supports, so to generate the maximal effect.

In fulfilment of its purposes, a non-profit foundation may only support other non-profit organizations. The support of for-profit organizations and individuals is permitted only in exceptional cases. An example for such an exception is the award of microloans for micro-entrepreneurs and enterprises.

Venture philanthropy thus offers an interesting possibility to non-profit foundations to promote the professionalization of the “third sector”, as it has been called by many who work in development aid. It has to be remembered, however, that the support of social businesses is reserved to non tax exempt venture philanthropy funds only.