A trust can be a useful tool for a family business to organize ownership, facilitate succession, and provide continuity to certain principles defined by the family across generations.
Although trusts are often considered from a legal, tax, or wealth structuring perspective, they can also be viewed through the lens of family governance: how ownership is organized, who makes decisions, and which rules should remain in place as generations change.
What is a trust?
It is a structure through which certain assets or rights are set aside for a specific purpose and administered according to predetermined rules for the benefit of one or more individuals. It is a recognized legal structure in countries such as Mexico and other Latin American markets, while other jurisdictions have different or equivalent structures, including trusts in common-law countries.
In a family business, this structure can help organize the ownership of certain assets or business interests and support their continuity across generations.
Trusts, governance, and generational continuity
As a business family grows, so does its complexity. Ownership may become distributed among more family members, and responsibilities that were once concentrated in one person begin to separate: owning the business, managing it, and making decisions about the family’s wealth.
This type of structure can help organize some of that complexity. However, the structure alone does not guarantee continuity.
Before considering one, a family should address deeper questions: What does it want to preserve? How does it want to exercise ownership? What role will future generations play? And how should decisions be made in the future?
A trust does not replace family governance
A structure can establish rules for certain assets or business interests, but it cannot replace the decisions a family needs to make about its future.
Before incorporating certain decisions into this arrangement, the family should define what it wants to preserve, how it intends to exercise ownership, and what role future generations will play.
For this reason, a trust should be understood as one component of a broader governance framework, where family governance bodies, owner agreements, and other mechanisms can coexist to organize the relationship between the family, the business, and the family’s wealth.
Trusts in Mexico and family businesses
In Mexico, these arrangements are regulated by the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito) and can be used to organize certain assets, business interests, and other elements of family wealth according to predetermined rules. In the context of a family business, a trust can form part of a broader approach to continuity, succession, and governance.
Its structure, operation, and legal and tax implications will depend on each family’s circumstances and should be analyzed with the appropriate specialists.
“A structure helps put a vision into practice. It cannot replace it.”
What should a family consider before choosing this structure?
Before establishing this structure, a business family should define what it wants to achieve through the structure and how it will fit within its governance model. Key questions to consider include:
- Which assets or business interests could be included in the structure?
- What long-term objective is the family seeking to achieve?
- Who should make certain decisions?
- What role will future generations play?
- How will this vehicle interact with the family’s governance bodies?
- How much flexibility will be needed over time?
In our Insight, we explore these questions in greater depth and examine trusts from the perspective of ownership, governance, and generational continuity, beyond their legal and tax implications.
Download the full Insight: “Trusts in family businesses: a tool to support continuity.”
At Family Enterprise Partners, we advise business families and high-net-worth individuals on family governance, wealth management and protection, and generational continuity.