A Closer Look at Employee Benefit Trusts (EBTs)

Some months ago we wrote a number of blogs outlining the basic structure of a Trust, and how Employee Benefit Trusts (EBTs) are typically funded.

To recap, an EBT is typically made up of three key players:

  • The Settlor: this is the party who decides they want to make some shares (or perhaps some cash) available for others. In an EBT, the Settlor is usually the Company seeking to make awards, but may occasionally be an individual shareholder.
  • The Trustee: this is the person who is ‘entrusted’ to look after the shares or cash for the benefit of others. The Trustee is the legal owner of the Trust shares, and is legally obliged to act in the best interests of the Beneficiaries.
  • The Beneficiaries: The individuals, usually the employees, former employees and close relatives, who could benefit eventually from the shares or cash if the Trustee decides. While the Trustee has legal ownership of the Trust shares, the Beneficiaries can have an underlying or equitable interest in the shares.

Funding for an EBT usually comes from the following sources:

  • A contribution from the Company.
  • A loan from the Company.
  • An external source, such as a bank.
  • Dividends from shares held.

The role of the Trustee

This month, we want to take a closer look at one of the main characters within the Trust – the Trustee, and why it is often important that this role is carried out by an experienced professional.

Broadly speaking, there are not a lot of limitations over who can act as a Trustee. Provided an individual is not under 18, or of unsound mind, they can be appointed as a Trustee.

Companies may also act as Trustees. The RM2 Partnership acts in a professional Trustee capacity for our clients through our special Trustee company – RM2 Trustees Limited. As professional Trustees, we help our clients to:

  • prepare for Succession Planning, as retiring shareholders sell their shares into the Trust (usually to be ‘recycled’ in an employee share scheme);
  • create an internal market for employees to buy and sell shares;
  • warehouse shares, to be released over time for employee incentives;
  • prevent shareholder dilution by recycling existing shares, instead of issuing new shares, for an employee share plan;
  • buy and sell shares from employees who leave when there is no other market for the shares;
  • co-own shares with employees to help them get the benefit of shares when they cannot afford to pay for them; and
  • to pass out dividends for the benefit of employees.

Usually, the first Trustee is appointed by the Settlor, and the appointment of subsequent Trustees would be determined by the rules as outlined in the trust deed. Commonly, the Company may seek the appointment or removal of a Trustee.

The duties of a Trustee

The most fundamental duty of any Trustee, be it an individual or a professional Trustee company, is that the Trustee must act in the best interests of the Beneficiaries. As well as acting in the interest of the Beneficiaries, Trustees must also act within the scope of their power as outlined in the trust instrument. Despite often being appointed by the Settlor, the Trustee should not follow the instructions of the Settlor unless they are of genuine benefit to the Beneficiaries.

The extent to which Trustees must consult with the Beneficiaries in relation to Trust property is often outlined in the Trust deed. For any organisation seeking to establish an EBT, it would be prudent to utilise the services of a professional Trustee when drafting the deed in order to ensure a certain degree of control is maintained by the Settlor over Trust property, where appropriate. As professional Trustees, RM2 have a greater duty of care to the Beneficiaries than a lay Trustee would have in the same position. Professional Trustees should be able to provide stronger assurances to the both the Beneficiaries and the Settlor that Trust property is dealt with in the most suitable way possible.

To find out more about RM2’s Trustee services, call us on 020 8949 5522, or e-mail enquiries@rm2.co.uk.