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"Trust: Versatile and Efficient Instrument for Business Structuring"

"Trust: A Versatile and Efficient Instrument for Business Structuring"


The trust has proven to be an adaptable and effective instrument for structuring various types of businesses, meeting the needs and objectives of both companies and individuals. Due to its versatility and adaptability, it is attractive for individualizing, separating, and/or protecting assets and/or rights, directing them towards specific purposes. Below are briefly outlined the characteristics of the business and its modalities.


Characteristics of the Legal Transaction


Through a trust, fiduciary ownership of a set of assets and/or rights is established, transferred by one or more settlors to a trustee for administration according to the instructions outlined in the trust deed, for the benefit of one or more beneficiaries, ultimately delivering them to the designated recipient (final beneficiary).


Fiduciary Ownership


The fiduciary ownership of the assets/rights transferred to the trust constitutes a "segregated estate," separate and independent from the parties involved in the business. It has the particular advantage of being linked to a specific purpose, defined in the trust deed. Thus, the trustee cannot dispose of the assets at their discretion as if they were personal assets but must adhere to the management instructions stipulated in the trust, acting with the "care of a prudent businessman," under penalty of liability. The trustee is obligated to account for their management to both the settlor and the beneficiary.


Types of Trusts


  • Trust Administration


In a trust administration, the trustee receives assets to be used for a predetermined activity, subsequently delivering the proceeds (profits, dividends, interests, etc.) to the designated beneficiary. Trust administration can encompass all types of movable or immovable assets, tangible or intangible. A common example is the administration of shares in family businesses, where shares are entrusted to a professional trustee for the benefit of specific family members until a milestone determines the trust's end, transferring the shares to the designated beneficiaries as defined by the settlor.


  • Investment Trust


This is a variant of the administration trust where assets transferred to the trust are to be invested by the trustee in risky and speculative operations to achieve profits. It is commonly used to channel the savings of companies and individuals, aiming for higher returns than those from, for example, fixed-term bank deposits. Funds are transferred to a trustee with instructions to invest them in financial instruments with a specific risk profile. For instance, multiple investors may pool their capital into a trust, enabling significant scale for investment in a foreign investment fund where the trust participates as a limited partner, following the investment terms and conditions set by the fund. Its advantage lies in enabling individual investors to invest small sums of money, promoting access to sophisticated investments typically requiring substantial minimum amounts, suitable for both individuals and small to medium-sized enterprises.


  • Construction Trust (Cost Trusts)


In this scenario, the trustee is instructed to use received assets to finance and execute a specific construction project. It is commonly used in building construction, where the settlors are the landowners and prospective buyers of units in the building. They strictly contribute the necessary funds for construction and, once completed, become beneficiaries by purchasing the units. This minimizes tax costs associated with real estate constructions.


  • Security Trust


In this type of trust, assets are transferred to the trustee to hold for a specified period until the fulfillment of a guaranteed contractual obligation through the trust. The beneficiary of the trust is the creditor of the contractual obligation. In case of default, the trustee may, for example, sell the trust assets and use the proceeds to pay the creditor, or pay them using the profits from asset management. An example is when a settlor (often a company needing financial resources) pledges future cash flows from its business activities (e.g., derived from commercial relationships with one or more clients) as collateral for its financial creditors. This modality is commonly used in the agribusiness sector.


An Attractive Alternative to Pledge and Mortgage as Traditional Guarantee Instruments


It is an appealing alternative to pledge and mortgage as traditional guarantee instruments. In many cases, it enables companies that do not have movable or immovable property to offer as collateral to access credit at reasonable interest rates. This instrument offers several advantages: simplification in guarantee enforcement, protection against bankruptcy proceedings, and often a more economical option than pledge and mortgage.


Conclusion


The trust is a versatile and practical instrument that allows for structuring various legal businesses with significant guarantees for all parties involved. It is particularly useful for protecting the assets or properties that comprise the trust estate, which cannot be seized by creditors of the settlor, trustee, or beneficiary. They can only potentially be pursued by creditors of the trust itself, arising from compliance with its instructions. On the other hand, creditors of the trust cannot take action against the personal assets of the trustee, settlor, or beneficiary, only being able to act against the trust assets.




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