Nominating shareholders as important as deciding on directors
Deciding on shareholders and the number of shareholders is just as important as appointing directors to protect estate assets in family trusts, according to a legal specialist.
Clinton Jackson, partner at Cooper Grace Ward Lawyers, said in a recent webinar that establishing a special purpose company for a trust is the best way to pass control of the trust and protect estate assets.
“For example, if I have a company as trustee for my trust, I can pass that a particular way, whereas if we had one company that was a trustee for more than one trust, that would cause some complexity in terms of how we pass control of those,” he said.
Jackson said there are a number of things to consider when setting up a company, including deciding who will be appointed as directors.
“The reason the directors are important is that they are the ones who make the decisions and you need to think about who you may want in that role.”
“The next thing you need to think about is what happens when they die, and how are directors then appointed to replace the directors who have passed. Under most company constitutions, it is a majority of shareholders who fill that role.”
He added that subsequently, the decision on who will be shareholders in a company is just as important.
“You need to think about what's going to happen when a shareholder dies. Do you want those shares to pass as part of the estate, which is what will happen if there is only an individual shareholder,” he said.
“Or do you need to think about other things and other options, such as jointly held shares, different share rights, and what number of shares are on issue depending on how many people you may want as shareholders in the future after your death.”
He gave an example of Charles, who has one share in the trustee company of the Windsor Family Trust. Charles wants William and Harry to effectively become the shareholders after he dies.
“The issue is who actually is going to get control of this particular company if Charles leaves one share to William and Harry?” he said.
“Most company constitutions state that the first name shareholder is the person who gets the exercise of votes, so even though William and Harry jointly own that share, only William gets the votes and we haven't achieved Charles’ desired outcome, as William is the only person who gets the estate.”
From an estate planning point of view, he said, it’s important to think about how many shares a company should have and in the example of Charles, there needs to be at least two so William can get one and Harry can get one, and they each then get equal votes in relation to how that company operates.
“Now in saying that, you're probably better off going with a more divisible number and the reason for that is obviously people can have more children, or children can pass away before their parents, and that can throw your numbers out.”
“So from a starting point of view, I normally like 60, 120, because they're divisible by one, two, three, four, five, and six, which gives you plenty of options.”