Protecting the Proceeds from the Sale of a Business

A trust for business sale proceeds is a structure that receives either the shares of a company before it is sold, or the cash once the buyer has paid. The timing matters more than the wording of the deed. A transfer made while a sale is only a plan looks very different, in the eyes of a trustee, a bank or a court, from a transfer made after the money has landed in a personal account.

This page is general information, not advice. Whether a trust suits an entrepreneur's exit depends on residence, the buyer, the sale agreement and the family. A qualified adviser should look at those facts first.

Why entrepreneurs consider a trust around an exit

A sale turns an illiquid business into a large, liquid sum. That changes the family's risk profile in several ways:

• The money is easy to move, spend or lend, and therefore easy to lose.
• A single owner now holds a concentrated pot with no company structure around it.
• Heirs, a spouse or former partners may have claims that were less visible while the wealth was tied up in shares.
• Decisions about who benefits, and when, are suddenly practical rather than theoretical.

Exit wealth planning is the answer to those risks. A trust is one tool among others, and it only works if the settlor genuinely gives up ownership. The Trusts Act explained page sets out the legal framework, and what is a trust covers the basics.

The three moments to bring value into a trust

Entrepreneurs usually face three possible moments. Each has a different character.

Before there is any buyer

The business is still a going concern, nobody has made an offer and the family is thinking ahead. Shares can be placed in trust with no sale in sight. This is the cleanest position: the transfer has an ordinary family purpose and no creditor or counterparty can argue it was a reaction to a specific event.

After heads of terms, before completion

A buyer has been identified and negotiations are under way. Moving shares at this stage is possible, but it raises practical questions. The buyer will want to know who the seller is, the sale agreement may restrict transfers, and the trustee must be comfortable with the deal it inherits. Advisers will also ask why the transfer is happening now. The honest answer should be documented.

After the money is received

The cash is in the settlor's hands. A trust can still be funded, but the settlor now has to demonstrate that the gift is real. A transfer made under pressure, for example when a claim has been threatened, is the kind a court may examine closely. See trusts and creditors for what a creditor can and cannot reach.

The trade-off is not about which route is "better". Early transfers carry more negotiation work but a stronger story. Late transfers are simpler but invite more questions.

A decision path before the sale

The tree below is a simplified reading aid, not a substitute for advice.

From planning to funding: the sequence

The detailed mechanics of setting up a trust are covered elsewhere on the network. Here the focus is on what is specific to an exit.

Shares or cash: which to place in the trust?

Placing shares

Holding the shares through a trustee means the trustee negotiates and signs as seller, with the settlor's input. The proceeds then arrive directly in the trust. This avoids a second transfer, but the trustee must be willing to take on the warranties and indemnities that buyers normally ask of sellers. Some trustees will insist on being protected from those exposures.

Placing cash

A transfer of funds is simpler for the trustee, who has no business risk to assess. The settlor, however, remains the seller and carries the sale agreement risks personally. The gift itself is made later, and its sincerity is judged by what the settlor does afterwards.

Tax consequences of moving assets into a trust differ according to the asset, the settlor's residence and the trust's position. That subject has its own page: see tax when you transfer assets into a trust.

How much control can the settlor keep?

Entrepreneurs often want to stay close to the money. The law allows some involvement, but there is a point at which a trust looks like a mere label on the settlor's own wealth. The page on how much control a settlor can keep explains the range, and sham trusts describes what happens when a court finds that the settlor never really let go.

Two tools are common:

• A trust protector, who can advise the trustee. Under article 24 of the Trusts Act 2001, a protector may be an adult, including the settlor, or a legal person. Unless the deed says otherwise, the protector can remove and appoint trustees, choose the governing law, change the place of administration and withhold consent to certain acts, without becoming a trustee.
• A letter of wishes, a non-binding note that tells the trustee how the settlor hopes the funds will be used.

Naming the settlor as protector is permitted by the statute but needs careful thought, because the more control the settlor holds, the weaker the argument that the assets have left the settlor's estate.

Choosing the form of trust

The structure should follow the purpose.

• A discretionary trust lets the trustee decide who receives what and when, which suits families whose needs will change after the sale.
• A family trust holding a diversified portfolio is a typical way to give a settlor's descendants a shared financial base.
• For protection against creditors specifically, the page on asset protection with a trust sets out realistic expectations and limits.

What a trust does not do

A trust does not erase obligations that already exist at the time of transfer. Claims that were already foreseeable, tax duties, family-law rights and creditor claims can still be pursued in appropriate circumstances. A trust set up in anticipation of a known dispute is the weakest case. If a transfer is made to put assets beyond the reach of a specific person, the outcome may be unfavourable for the settlor and the trustee alike.

The transparency requirements apply as well. For FIAMLA 2002 purposes, the beneficial owner of a trust-type arrangement includes the settlor, the trustee, any protector, each beneficiary (or the class of beneficiaries and the objects of a power) and any other individual who ultimately exercises effective control, including through a chain of control. A company whose shares are transferred to a trust must also identify and record its beneficial owner under section 91 of the Companies Act, and update that register when shares change hands.

Article 33 of the Trusts Act 2001, as rewritten with effect from 29 May 2019, requires the trustee to keep trust information confidential. A court orders disclosure only on a request from an investigating authority, where the information is required in good faith for an investigation or proceedings concerning a financial crime. For more on this topic, see trust confidentiality.

Questions to settle before the sale agreement is signed

• Who are the intended beneficiaries, and in which proportions or classes?
• Does the sale agreement restrict the transfer of shares or the use of proceeds?
• Will the trustee act as seller, or will the settlor sell and then gift?
• How much control will the settlor keep, and is that consistent with a genuine transfer?
• What is the position for the settlor's spouse, children or former partners?
• Which tax rules apply in the settlor's country of residence?
• Is there any known or threatened claim that could be raised against the transfer?

A trust for business sale proceeds is rarely a last-minute fix. Entrepreneurs who consider it early have more options and a stronger record. To discuss a specific situation with a corporate service provider holding a Management Licence from the Financial Services Commission, use the contact form.