Passing a Family Business to the Next Generation

A family business rarely passes smoothly. One child works in the company every day; another lives abroad and wants nothing to do with it; a third is still at school. A family business succession trust is one way to give each of them a defined place without cutting the company into pieces or forcing a sale. This page looks at succession planning for a family business through the lens of the trust: who holds the shares, who decides, who benefits, and where the limits lie.

It is general information, not advice. The right answer depends on the company, the family and the countries involved, and should be tested with an adviser.

Why a family business is hard to pass on

Ordinary inheritance divides property. For a house or a bank balance that may be acceptable. For a company, it often is not. Shares left equally to every child can produce a board in which a majority of owners have never worked in the business, and the person who built its value alongside the founder holds the same stake as someone who takes dividends and nothing else.

Mauritian succession rules add a further layer. Part of an estate is reserved to certain heirs, and the founder cannot freely direct every share. The page on forced heirship and trusts explains how those rules interact with a trust, and matrimonial regimes can also affect what the founder actually owns.

A trust does not make these questions disappear. It gives the family a place to answer them in writing, in advance, while the founder is still able to explain what they intend.

How a trust holds family company shares

In the simplest design, the founder (the settlor) transfers the shares to a trustee under a trust deed. The trustee becomes the legal owner of the shares and holds them for the beneficiaries named in the deed. The company carries on trading as before; only the registered owner of the shares changes.

This is what people mean when they say a trust holds family company shares. The trustee does not run the business day to day. It exercises the rights that attach to the shares: voting at shareholder meetings, appointing and removing directors, and deciding what to do with dividends, in line with the deed.

The same diagram works whatever the size of the business. What changes is the content of the deed: who may be appointed to the board, how dividends are shared, and what happens if an heir wants to leave.

Separating active and passive heirs

The strongest argument for a trust in this setting is that ownership and control can be separated. The deed can say that the trustee votes the shares, while the beneficiaries receive value from them. That makes it possible to treat different heirs differently without treating them unfairly.

Typical arrangements include:

• Employment and board seats reserved for family members who meet conditions set in the deed, such as relevant experience or a trial period in a junior role.
• Income rights for passive heirs through dividends, so that they benefit from the business without sitting on its board.
• Capital rights that are deferred, for example for a minor child. A trust for minor children can carry this within the same structure.
• Buy-out options, allowing an active heir to purchase a passive heir's interest on terms the deed fixes in advance.

A discretionary trust gives the trustee flexibility to adjust shares of income as circumstances change. A fixed arrangement gives heirs certainty. The comparison between discretionary and fixed trusts sets out the trade-off, and many families blend both: fixed rights to income, discretion over capital.

The roles around the business

The founder is often reluctant to let go. Under section 8 of the Trusts Act 2001, a settlor may also be a trustee, a beneficiary, a protector or an enforcer, but may not be the sole beneficiary of the trust created. That gives the founder room to remain involved, while the requirement that others benefit keeps the arrangement a genuine trust. How far control can go before a court questions the structure is covered in how much control a settlor can keep and in the discussion of sham trusts.

A trust protector is particularly useful in a business context. The protector can be given a say over the sale of the company, the appointment of a chief executive from the family, or a change of trustee, without taking on the trustee's administrative role. See protector powers for what such a clause can contain.

What the trustee needs from the company

Placing shares in trust has practical consequences for the company itself. Several points are worth planning from the start.

Registers and beneficial ownership

A company must be able to identify its beneficial owner at all times. Under section 91 of the Companies Act 2001, it keeps a separate register recording, among other things, the name, address, national identity card or passport details, nationality and ownership structure, and files that information through the CBRIS platform when it is incorporated, when it files its annual return, and on any transfer or issue of shares. The share register itself must be kept for at least 7 years after the relevant transaction.

The Registrar of Companies keeps a Beneficial Ownership Register, which is open to competent authorities and other prescribed public authorities. The Companies Act does not describe it as a public register. Questions of confidentiality for the trust itself are addressed in are Mauritius trusts confidential?.

Changes of director

If the trust leads to a change of directors, the company must notify the Registrar within 28 days of any appointment or resignation of a director or secretary, or of a change in their details. Where this is not done, each director and the secretary commits an offence liable to a fine of up to Rs 200 000 (Companies Act, section 142). A succession is exactly the moment when such changes cluster, so the deed and the company's own calendar should allow for it.

A sole owner who is also the sole director

Many family businesses begin as a one person company: a private company whose only shareholder is also its only director. The Companies Act asks that the application name the person appointed to act as secretary and to call a meeting of the heirs if the sole director dies. That clause is a small recognition of the succession problem; a trust deed addresses it far more fully, but the two should be consistent.

Trustee duties and anti-money-laundering checks

A qualified trustee under the Trusts Act is a reporting person under the FIAMLA. It must carry out customer due diligence and report suspicious transactions. Knowingly providing false due diligence information is an offence, punishable by a fine of up to Rs 500 000 and imprisonment for up to 5 years.

In practice, families should expect to be asked for documents about the origin of the business, the source of its value and the identity of everyone involved. Preparing these early speeds up the process and avoids surprises. The trustee's obligations toward the family are set out in duties of a trustee.

A step-by-step view of the transfer

The letter of wishes matters more here than in most trusts. It is where the founder can explain the reasons behind the arrangement: why one heir was favoured for a board seat, or what should happen if the business is eventually sold.

Alternatives and complements

A trust is not the only tool. A will takes effect only at death and leaves the shares exposed to succession formalities in the meantime. Whether the trust avoids those formalities is discussed in does a trust avoid succession formalities?. A foundation, governed by the Foundations Act 2012, can also carry a family business. It has legal personality only once it is registered with the Registrar and holds a certificate of registration, and its founder may be a beneficiary. The comparison between a trust and a foundation shows how they differ.

Some families combine tools, for instance a trust at the top and a company underneath. The separate question of whether to use a holding company is covered on its own page, trust or holding company.

Limits and risks to keep in view

• A trust cannot rewrite the law. Forced heirship rules, creditors' claims and matrimonial rights still need analysis. Where the settlor is not a citizen, the Trusts Act provides that the transfer cannot be annulled under the succession rules of the settlor's domicile or nationality, but this does not settle every question in every country.
• The deed must be workable. A clause that is too rigid can paralyse the company. One that is too vague invites disputes between heirs.
• Conflicts of interest are real. If an heir sits on the board and also benefits from decisions, the deed should say how the conflict is handled.
• Tax depends on residence and structure. See how trusts are taxed in Mauritius and the position of transfers into a trust. Tax in the heirs' home countries is a separate matter.

Checklist before moving a business into a trust

• List every heir and note who works in the business, who does not, and who is a minor
• Obtain an up-to-date list of shareholders, directors and beneficial owners
• Check the company's constitution for restrictions on share transfers
• Decide which decisions need the protector's consent
• Agree how an active heir is chosen, reviewed and, if needed, replaced
• Set out what passive heirs receive and how they can exit
• Write a letter of wishes to accompany the deed
• Confirm that the arrangement is consistent with the founder's will and marital property regime
• Plan the filings that follow a change of directors or shareholders
• Schedule a regular review of the structure

If you would like to discuss your situation with an FSC-licensed corporate service provider (Management Licence), you can send a request through the contact form.