Trusts and family businesses: the ideal succession solution?

Bryony Cove and Jennifer Ridgway are contributing authors of a chapter in the newly published Business Families and Family Businesses: The STEP Handbook for Advisers, Third Edition. This article by Annabel Spearman summarises the authors’ conclusions.

In this timely chapter, the authors explore how families can use trusts to protect their businesses from both external geopolitical threats and internal threats posed by the actions of family members themselves. 

Co-authored with Nicola Arnold and Victoria Blackburn of JTC Private Office, this chapter offers guiding principles and practical examples for trust practitioners. The authors highlight how trusts are particularly well positioned to safeguard wealth over the long term, in a way that reflects the values and intentions of those who created them. Trustees can act with the benefit of a long-term, broad perspective of the business, even as the identity and involvement of the beneficiaries changes over time. It recognises, however, that planning for the family business can be an emotional and delicate endeavour, and accordingly offers a clear-eyed analysis of the potential pitfalls and solutions when placing a business into trust.

Some key areas of consideration are:

1. Control. While the courts may be consulted in relation to particularly significant decisions (eg sale of the family business), for the most part the trustees must steer their own course, taking into account relevant aspects of the trust assets, the beneficiaries and the wider context. In this endeavour they can be helped and guided by the original wealth creator’s written statement of wishes, and their powers may also be subject to formal checks and balances such as powers of veto or consent granted to a third party (eg a protector). Nonetheless, the chapter highlights that a very common concern for families contemplating settling the family business into trust is that decision-making will pass away from the family.
   
   Solutions explored include using a holding company to hold the trading business, thereby separating out ownership, oversight and management of the business; and protector committees, thereby ensuring a future-proofed oversight role. The chapter also highlights that there are situations in which it is for the benefit of the business for control to move away from the family, for example when no second-generation individual is well suited to replace the role of the original founder.
2. Informing and giving a voice to beneficiaries. Beneficiaries have a right to ensure that the trust is administered correctly and to hold trustees to account – and usually, therefore, have a right to information to enable them to do this. The chapter explores the balancing act between providing information in the spirit of openness and collaboration and protecting confidentiality, including that of other beneficiaries, the settlor and the trustees’ decision-making process. The authors also highlight that different generations may have different views on the importance of sustainable, longer-term principles for a business compared to shorter-term financial gains, and that a well-structured trust can allow for this shift in focus.
   
   The chapter also considers the importance of carefully considered governance and communication strategies to head off the risk of disputes between beneficiaries and trustees, such as regular agreed cycles of meetings, reporting protocols and family values documents.
   
   Finally, the authors deftly consider the case of vulnerable beneficiaries, and how the use of a sub-trust could earmark assets for these individuals. This includes potentially an expectation that some family business assets could be purchased by other family members so that the sub-trust can invest in income-producing assets, recognising that to enable their care needs to be met a disabled individual may require an income stream which exceeds the revenue the family business can produce in the short term.
3. Approach to investment. A prudent trustee would often seek to hold diversified investments to mitigate risk, but this approach clearly needs adjustment in the context of a trust whose aim is to hold a single family business. This requires careful management, including engaging with and recording the wishes of the settlor and beneficiaries for the trust to maintain a single holding, and ensuring that any "diversification" assets truly fulfil that role (eg a separately managed investment portfolio could still be overexposed to the same sector as the family business, reducing its effectiveness as a "hedge"). Sustainable investment also requires careful thought if it is unlikely to produce a positive financial outcome in the short term. While case law has confirmed it can be for a beneficiary’s benefit for the trust to meet the beneficiary’s moral obligation, ideally the trust document itself would authorise the trustee to decide on investments using a holistic rather than purely financial approach.
4. Involvement in the business. The chapter explores the highly complex – and often litigated – area of how far a trustee needs to be involved in the business when the directors are the decision makers day-to-day. This includes situations where the trust contains a specific clause exonerating the trustee from a duty to monitor the running of the business in which they are invested (an "anti-Bartlett" clause). The trustee will need to take a bespoke approach depending on the particular circumstances, and bear in mind that they will always need to take steps if they are put on notice of a problem or of facts that merit investigation.
5. Other advantages. The authors tackle head-on the outdated but popular view that the primary advantage of trusts is to reduce tax liabilities. While families need to understand and seek advice as to the tax regime which will apply to a trust as opposed to personally held assets, the authors suggest that realistically the trust may not bring with it a tax advantage. Instead, the more pertinent advantages are likely to be wealth preservation and continuity of succession planning.
   
   They also explain how the family’s philanthropic goals can be met by using a charitable foundation alongside or within the trust, so that the family has a formal vehicle to enable cross-generational, strategic charitable giving for the long term.

The authors tackle a fundamental question: can a "business family" afford not to have a trust? They recommend that families consider this carefully, including, for example, whether a family that is highly familiar with corporates would be more comfortable with a trust alternative such as a European foundation or family corporate holding vehicle (a "family investment company").

The trust cannot be a panacea: in an increasingly regulated world, the cost of running a trust should not be underestimated, and disputes among family members can never be ruled out. The authors provide a pragmatic summary, however, of the many threats to the family business that a well-run trust can help mitigate: divorce, creditors, death, incapacity – and relieving any one family member from the burden of being the ultimate decision maker in relation to inherited wealth.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2025