It often happens that business owners are worried about passing a family business to the next generation. In particular, an owner may harbour this concern because his or her successor is still too young to be a part of the company or, alternatively, because, regardless of age, there are other serious reasons for fearing that the generational transfer may cause problems, such as claims by creditors or the squandering of the company’s assets due to an expensive lifestyle, or even the concern that the next generation may be incapable of properly managing the company.
Therefore, a trust can segregate the stock or company, if it is advisable not to assign it directly to the next generation, for the time being at least, who may in any case enjoy the profits of the business.
A trust can be used for commercial and financial transactions in place of a company, by assuming the function of a holding company, if necessary. For example, if a loan has been taken out that provides for priority to be assigned to one class of lenders over others, the trust can function as a vehicle, for both collecting financial resources and making payments to the eligible companies; and the trustee will be responsible for collecting the interest and principal from the beneficiary company, and for paying the corresponding sums to the lenders, according to the priorities agreed in the trust deed.
Moreover, a trust operating as a holding company replaces the ordinary trust in favour of beneficiaries, when the purpose pursued by the settlor is tying the company’s shares, on a long-term basis, without any family members being entitled to demand them from the trustee.
Trusts can also be used for managing shareholder agreements and, generally speaking, for the management of administrative rights. They may overcome the limitations inherent in shareholders’ agreements, such as, for example, their duration, and more effectively regulate the relations between the participating shareholders.
Trusts may also be used as arrangements for guaranteeing the fulfilment of an obligation by the settlor. In this case, the trustee will undertake obligations directly towards the settlor’s creditor, or may be required to use the trust fund to the advantage of the settlor’s creditor, should the settlor fail to comply.
These characteristics allow it to be used also as an alternative to a conventional hypothecary guarantee (mortgage), the trust fund becoming the guarantee for the payment of the loan and regulating in detail how the trustee should behave, or within the insolvency procedures for the protection of creditors .
To this end, the use of the purpose trust is used as a form of guarantee for external finance in arrangement with creditor procedures.
In particular, the assets of the third guarantor are not covered by the so-called “protective umbrella” (Article 168 and 182-bis of the LF), since, as expressly provided in the aforementioned provisions, these effects are only produced on the debtor’s assets and not also those of the third guarantor, since they are not part of the debtor’s assets.
The contribution of assets to a trust is a solution to the problem, especially as they can be tied up until the approval of the procedure, if approved, or until their final disposal, with the allocation of the relevant proceeds to pay the creditors .
This solution has already been adopted by several Italian courts, including Milan, Palermo, Pescara and Reggio Emilia.