Owning shares in a company can be a great source of income and a valuable asset. As with any area of commerce, there are risks around maintaining such an asset, so it is essential to find ways to protect your interests. A common practice is to hold your shares in a trust. This means you would give your shares to a trustee to hold and maintain for the benefit of the beneficiaries. Depending on the structure, you can name yourself as the beneficiary or trustee, or both. You can tailor the trust to your specific needs in a wide range of ways. This article will cover how you hold shares in a trust and some benefits of doing so.
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How Does Holding Shares in a Trust Work?
When you own a share of a company, you own a part of the company as your property. Likewise, you have rights to a portion of its income. The company can distribute a portion of its profits to you in the form of a dividend. You will also have voting rights attached to your shares. As a shareholder, you are only liable for any money you owe on the share.
In New Zealand, shareholders can be an individual person, another NZ company, or any other legal entity, including a trust. In the case of a trust, the trustees would be registered as joint owners of the shares. They hold and manage the shares for the trust and distribute income for the benefit of the beneficiaries. Trustees are also the ones who hold the voting interests attached to the shares.
As joint shareholders, each trustee will need to provide the company with:
- their full legal name; and
- a residential address.
The company will then give this information to the Companies Office as part of the mandatory reporting requirements for shareholders.
How Can My Trust Own Company Shares?
If you are a shareholder of a company looking to transfer your shares into, for example, a family trust, you will need to transfer your shares from your personal name into the names of the trustees. You should prepare documentation to record the transfer, mainly a deed of gift, to gift your shares into the trust and a share transfer form to evidence the transfer.
If you have not yet set up your company, you can issue the shares into the trust on the incorporation (or setup) of the company. In either case, you should prepare a trust deed, a memorandum of guidance for the trust, and opening minutes and trustee resolutions for the establishment of the trust.
While there are benefits to holding your shares in a trust, it is important to note that running one is not an easy process. There are many administrative, financial and disclosure considerations you need to take into account. Further, you would typically need to engage an accountant to help manage it from a financial perspective.
Continue reading this article below the formBenefits of Holding Shares in a Trust
Asset Protection
When you hold shares in a trust, the trust is not the legal owner of the shares; the trustees are. So, if you have set the trust with the intention of being the beneficiary receiving the income from share dividends, the shares are still not held in your name.
There is separation between your personal assets and the trust assets. This means that the trust assets may be better protected against claims by creditors and cannot be drawn from to pay back any personal debt owing by you. In certain situations, such as a breach of directors duties or a director being personally liable for the actions of the company, a creditor with a claim against the director will not be able to claw back the director’s shares if the director holds its shares in a trust.
Tax Efficiency
If you own the shares personally, you pay tax on any income you receive based on your personal tax code. But, if you place the shares in a trust and the trustees have the discretion to distribute the income to beneficiaries, then the tax is determined based on the tax code of each individual beneficiary.
This is useful if you have set up shares in a family trust, and the beneficiaries are your family members who may have lower tax rates. This would allow for income tax efficiencies. If you are looking to set up a trust for tax efficiency purposes, it is recommended to seek accounting advice to understand the tax and accounting implications of holding shares through a trust.
Ease of Succession
When selling shares, there is a lengthy process that changes depending on the rules of the company and your personal circumstances.
However, if you hold the shares in a trust, you can simplify this process. The trust retains the shares as its assets, so they are not changing hands. Accordingly, you can change who controls the shares when you change trustees. This is different from selling the shares. You will still receive the long-term benefits of those shares as long as the trust is still running.
Key Takeaways
Holding your shares in a trust can be a good way to protect your valuable assets, particularly against creditors making claims against you personally. This business structure offers a separate avenue of control of your shares while you can still reap the benefits. There are also potential tax benefits, and succession planning for the management of your shares is a lot easier. But, maintaining a trust is not an easy job, and there are strict requirements now for how you should run a trust.
If you would like more information or help holding your shares in a trust, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
A trust is a legal relationship that forms when a settlor gives assets (such as real estate or shares in a company) to a trustee to hold and maintain for the benefit of the trust’s beneficiaries. The trustee has to make good business decisions about the assets, to make sure that they are available for the benefit of the beneficiaries.
A shareholder is an individual person, a company, or other legal entity that owns shares in your company. This means they are entitled to a portion of the profits of your company and have some voting rights on decisions that concern their interests.
You own shares through a trust by naming your trustees as joint shareholders of your shares. They have to provide the details of the trust to the company and provide their contact details. They then distribute the income from the shares to the beneficiaries of your trust.
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