Published — June 30, 2017
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
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For family-owned corporations where, inevitably, the business torch has to be passed from one generation to the next, preservation of the corporate assets could prove to be a tricky task. Since the risk of mismanaging assets is generally higher for the succeeding generations as compared to the preceding ones, as the latter are supposed to have been tested already by both time and experience, it is crucial that business owners, especially of family-owned corporations, are able to plan on how to better protect the corporate assets in the hands of their successors. In view of this, creation of trusts for purposes of asset preservation may deserve a closer look.
Trust is the legal relationship between one person having an equitable ownership in property and another person owning the legal title to such property, the equitable ownership of the former entitling him to the performance of certain duties and the exercise of certain powers by the latter. [54 Am. Jur. 21]. Given the said concept, it may be said that trust can be used as a legal device or arrangement whereby a person would deliver part or all of his properties to another person to administer and manage the said properties for the benefit of designated person(s) [See the definition of trust given by the Trust Officers Association of the Philippines, www.toap.org.ph].
It is an arrangement composed of three parties—the trustor, trustee, and beneficiary—each with his own rights and obligations [See Article 1440 of the Civil Code]. The trustor is the owner or the person establishing the trust; the trustee is the one in whom confidence is reposed as regards property for the benefit of another person; while the beneficiary or “cestui que trust” is the person for whose benefit the trust has been created. The said parties involved in a trust could be a natural person or a juridical entity like a corporation or institution.
To optimize asset preservation, it is very important that the trust should be protected by limited liability. So how do you go about it? One possible and convenient way to do this is through a corporation. In the article “Corporation as a Business Structure: Most Preferred for Your Growing Enterprise”, we discussed that a corporation has a personality separate and distinct from its stockholders, officers, or directors. Hence, limited liability for the trust is possible if a corporate trustee is appointed in an irrevocable trust. Why irrevocable? It is so because in case of irrevocable trust, the trust property is permanently removed from the domain of the trustor, and is transferred to the trust. Thus, it can be used to shield the trust property from liabilities that the individual shareholders’ properties may incur, and vice-versa. Section 92 of Republic Act No. 8791, which regulates the organization and operation of trust entities, even supports this concept of limited liability when it states that, “[n]o assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trusts.” Thus, with limited liability, it is now up to the trustee to manage without worries the assets for the best interest of the beneficiaries of the trust.
To better protect the trust, it would be more advisable for corporate trustors if the trust will be insulated from the corporate business by holding the corporation’s shares indirectly through holding companies. These holding companies are owned by the trust. Therefore, with this arrangement of indirect ownership of shares, whenever the corporation submits its General Information Sheet to the Securities and Exchange Commission, it would be the holding companies that would appear as the owners of the shares, and not the trust itself. Such insulation gives more protection to the trust, and the confidentiality of its existence shall be easier to maintain. This practice of creating holding companies for purposes of holding the corporation’s shares for the trust is called “layering.”
For example, Mabuhay, Inc. was appointed as trustee of the assets of Triple A Corporation. YY Holdings Corp. and ZZ Holdings, Inc. (holding companies), which are both owned by Mabuhay, are the ones who own the shares of stocks of Triple A, creating a layer of corporate shareholders. In such arrangement, Triple A is the trustor, Mabuhay is the trustee, and the holding companies owned by Mabuhay constitute a layer.
Layering does not affect the declaration of dividends. In fact, layering may even trigger the application of inter-corporate dividends, which is not subject to tax as provided under Section 27(D)(4) of the National Internal Revenue Code. Thus, whenever the corporate trustor would declare dividends, the recipients of which shall be the holding companies (inter-corporate dividends; not taxable) for being the legal owners of the shares. When the holding companies, in turn, declare dividends, the trust would now be the ones receiving such dividends (also considered as inter-corporate dividends, which are not taxable) for being the legal owner of the holding companies’ shares. These dividends received by the trust from such holding companies will now form part of the trust assets being held for the benefit of the beneficiaries, who are the equitable owners of the same.
Moreover, corporate governance and ownership governance are kept separated at all times. Thus, the existence of trust does not, in any way, affect the way corporate affairs are being ran. It must be noted that corporate governance is lodged in the Board of Directors, and the Board acts independently from the trust, which takes care of ownership governance.
In case of conflict between and among the major shareholders of the corporate trustor, the trust may also be used as a vehicle to keep the shares intact and to protect them from dissipation. In some companies, some stubborn shareholders, especially in family-owned corporations, would hold the corporation hostage by constantly threatening to sell their shareholdings to outside persons. If there is a trust, which by all means is a neutral entity, such threats can be avoided, as the individuals who compose the corporation cannot, by themselves, do whatever they want to do with their shares. It is so because the trust itself holds the shares in its own name, and manages the trust properties in accordance with the trustor’s instructions.
Given the foregoing, since preservation of corporate assets is a legitimate concern especially of successful businesses, establishing a trust through a corporate trustee to manage such assets would be among the viable options to consider. It is understood, however, that with respect to matters regarding the company’s operations and business affairs, the same shall still yield to the wisdom of the Board of Directors of the corporation whose assets are being preserved.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding trust and other legal aspects of asset preservation, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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