What is the best structure for a trust?
When your trust is to own your trading and investment companies, you need to carefully consider how they should all be interconnected.
Most advisors will tell you that the trust should own a holding company that in turn should own the trading and investment companies like this –
But that is not ideal, because, although the trading company can declare its excess after tax profits to the holding company as dividends, the holding company then has to lend the money to the investment company so that it can buy more investment assets.
Here’s a much better way –
The risk sits with the trading company, so any excess after tax profits are sucked up to its shareholder, the investment company, in the form of dividends. There is no Dividends Witholding Tax because the shareholder is a company, and also the dividend flow is a one-way street. The creditors of the trading company cannot pull the dividends back down provided the trading company’s assets exceeded its liabilities when the dividends were declared.
This way the value of the trading company can be kept close to zero, so there’s nothing for its creditors to grab if things go sour. The investment company holds the money and is free to use it to grow its property (or share) portfolio.
There are two possible refinements.
- If the trading company needs premises, the investment company can buy them, and rent them to the trading company.
- If the trading company needs production assets, such as machinery or vehicles, the investment company can buy them, and rent them to the trading company.
In both cases money flows to the investment company as rental instead of dividends, which is simpler, but the main reason is that if the trading company goes belly up, the production assets are not lost.