Increasing popularity of employee benefit trusts

By Sofia Shen, Maples Fiduciary

Traditionally, trust structures are widely used by wealthy families to hold private family assets. In recent years, trusts have increasingly been used to hold shares in a company for the benefit of such company’s employees. This type of trust structure is known as an employee benefit trust (EBT).

The usual purpose of setting up an EBT is to attract, reward and incentivize employees, and to improve company performance and competitiveness. An EBT is distinct from a company’s pension fund, which can also be structured as a trust. An EBT is generally structured as a discretionary trust and created by the execution of a trust deed and the transfer of shares of the company – or stock options or restricted shares, as the case may be – to the trustee of the EBT.

Sofia Shen
Vice president
Maples Fiduciary

Although the EBT is a discretionary trust of which the trustee usually has discretion in determining which beneficiaries receive the income and capital of the trust and when they receive it, the trustee of the EBT is guided by the scheme rules incorporated by reference into the trust deed. The scheme rules set out the detailed criteria regarding how and when beneficiaries of the EBT become eligible to receive benefits from the EBT.

The range of benefits that beneficiaries can receive is determined by the type of the property settled into the EBT, which can include shares of the company, stock options or restricted shares. Beneficiaries of the EBT are pre-selected at the creation of the EBT and are usually members of the senior management of the company. Being a beneficiary of the EBT, however, does not guarantee receiving benefits from the EBT.

Beneficiaries’ interests are not vested until a determination by the trustee in accordance with the scheme rules. Sometimes an employee leaves the company before his or her beneficial interest in the EBT has vested and consequently his or her interest is forfeited.

Using an EBT to hold shares for the benefit of employees has some advantages compared to using other vehicles. First of all, shares are ring-fenced. Once assets are settled into a trust, the legal title to such assets passes from the settlor to the trustee of the trust, who holds the assets on behalf of the beneficiaries until the assets are distributed to the beneficiaries.

If the settlor becomes insolvent (if a company) or bankrupt (if an individual) during the term of the trust, the settlor’s creditors may not be able to claim against the trust assets. Second, employees’ interests are protected. The trustee of an EBT should protect and preserve the trust property and act in the best interests of the beneficiaries. The trustee cannot engage in self-dealing, nor undertake a transaction that would be adverse to the beneficiaries’ interests. Therefore, employees who are the beneficiaries of the EBT can be reassured that their beneficial interests are protected.

In addition, a professional trust company is usually employed to act as the trustee of an EBT. Professional trust companies usually have the knowledge and expertise to administer the trust, which should provide additional comfort to employees that the EBT is being properly administered.

Some jurisdictions’ trust laws have unique features. For example, in the Cayman Islands, the “STAR” trust is a popular structure for EBTs. STAR trusts are known as such because they were first introduced into Cayman Islands law as a consequence of the Special Trusts (Alternative Regime) Law now consolidated within the local Trusts Law (2011 Revision). STAR trusts are non-charitable purpose trusts, which can be established solely for a specific purpose, or for the benefit of beneficiaries, or for a mix of both.

Unless a beneficiary is also an enforcer, a beneficiary has no rights to information about the STAR trust unless he or she is granted those rights in the STAR trust deed. In the context of an EBT, if the settlor does not want employees (who are beneficiaries of the EBT) to have rights to find out the shares that may be awarded to any other beneficiaries, the EBT can be structured as a STAR trust and beneficiaries cannot access this information, provided such beneficiaries are not appointed as enforcers of the STAR trust.

We have recently seen an increase in the number of enquiries regarding EBTs in Asia, in particular those being established by Chinese companies, and we are confident that their popularity will continue to rise.

SOFIA SHEN is a vice president at Maples Fiduciary in Hong Kong


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