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Understanding Business Trusts

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A business trust is an arrangement in which a trustee holds and manages property or assets for the benefit of beneficiaries. The beneficiaries can be individuals, companies, or other trusts. Business trusts are often used to manage investments, hold property, or carry on business activities.

Advantages of using a business trust include:

Asset protection: The assets of the trust are protected from the beneficiaries’ creditors.

Flexibility: The terms of the trust can be customized to meet the specific needs of the beneficiaries.

Professional management: The trustee is a professional who is experienced in managing assets and property.

Disadvantages of using a business trust include:

Cost: The trustee is entitled to a fee for their services.

Loss of control: The beneficiaries have no direct control over the trust property or assets.

Compliance: The trustee must comply with the terms of the trust and the law.

A business trust can be a useful tool for managing assets and property. However, it is important to understand the advantages and disadvantages before setting one up.

Types of Trusts

A trust is a legal arrangement through which one person, called a settlor, gives property to another person, called a trustee, to hold for the benefit of a third person, called a beneficiary. Trusts can be created for any number of reasons, including to provide for the care of children or pets, to manage property for people who are unable to do so themselves, or to minimize taxes.

There are many different types of trusts, but they can generally be categorized into two main types: testamentary trusts and living trusts.

A testamentary trust is created by a will and only comes into existence after the trustor dies. The trustee is given the responsibility of managing the trust property for the benefit of the beneficiaries.

A living trust, on the other hand, is created during the trustor’s lifetime. The trust property is transferred to the trustee while the trustor is still alive, and the trustee manages the property for the beneficiaries.

There are many other types of trusts, including special needs trusts, charitable trusts, and irrevocable trusts. Each type of trust has its own specific purpose and rules.

If you’re considering creating a trust, it’s important to understand the different types available under the law.

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Business Trusts are A Special Type of Trust

Bursa Malaysia’s website says this about business trusts:

Business Trust is a new asset class introduced in the Malaysian capital market following the release of the Securities Commission Malaysia’s Business Trust Guidelines which came into force on 28 December 2012.

Business trusts are business enterprises set up as trust, instead of companies. They are hybrid structures with elements of both companies and trusts.

Like a company, a business trust operates and runs a business enterprise. But unlikely a company, it is created by a trust deed under which the trustee has legal ownership of the trust assets and manages the assets for the benefit of the beneficiaries of the trust.

Unit holders of a business trust can participate in the profits or income arising from the management of the assets in the business trust through receipt of distributions declared by the trustee-manager.

Business trust are suitable for businesses which are capital intensive with stable cash flow wishing to pay distributions out of cash flow without being constrained by accounting profits. The flexibility in the payment of distributions is an advantage especially for businesses which may be affected by high depreciation charges. 

Whereas, Bursa Malaysia’s FAQs defines business trusts as follows:

“A Business Trust is defined as a unit trust scheme where the operation or management of the scheme and the scheme’s property or asset is managed by a trustee-manager.”

Structure of a Business Trust

The structure of a business trust, as described in Bursa Malaysia’s website, shows that the business trust is at the center and it deals with:

  1. The asset, which is held under the trust;
  2. The trustee-manager, which legally owns the asset;
  3. The unit holders, who invest into the trust.

In turn the trustee-manager is responsible to its shareholders.

The beneficial ownership of the asset belongs to the trust, but the legal ownership of the asset belongs to the trustee-manager.

The trustee-manager manages the business trust, acting on behalf of the unit owners, and is rewarded in fees.

The unit holders buy into the unit trust, which give them an interest in the business trust.

The business trust in Malaysia is an enterprise

Business trusts are trusts set up by a deed of trust, managed by the trustee-manager. The trustee-manager is governed by the Trustee Act 1949, in addition to the guidelines for business trusts issued by the Securities Commission. The business trust can be used as a vehicle to raise funds through a listing on the stock exchange.

An article from The Edge Finance describes business trusts as similar to REITs, because both are unit trust schemes. Business trust has less stringent compliance requirements and can make pay outs to its unit trust holders on a steady and recurring basis.

Under chapter 9 of the Securities Commission guidelines, the business trust should be listed on the Main Market and unit trusts should be offered to members of the public, for at least 2% of the approved scheme, or 10 million units, whichever is higher (para 9.14). However, an offering to members of the public is not required if more than 50% of the voting rights can be exercised by a listed entity, which in turn wants to make a restricted offer for sale, or distribute “in specie” to its shareholders, or unit holders of the business trust.

The market capitalization test for the business trust

Under the Securities Commission guidelines for business trusts:

  1. The total market capitalization for the business trust should be at least RM1 billion based on the issue or unit price;
  2. Where listing is based on the strength of the business trust group, the business trust seeking listing and its subsidiary entities must have common controlling unit trust holders, or shareholders, for at least 1 full financial year prior to submission to SC;
  3. The core business of the business trust must have been operating and generating operating revenue for at least 1 full financial year prior to submission to SC.

Requirements for a trustee-manager

The trustee-manager should:

  1. Hold a Capital Markets and Services License for fund management;
  2. Carry out his duties with diligence in accordance with SC’s guidelines;
  3. Maintain proper accounting records, and retain the records for 7 years;
  4. Provide assistance to the SC whenever required;
  5. Comply with the Licensing Handbook;
  6. Ensure that the assets of the business trust are held for the benefit of the unit holders, and identified as business trust assets separate from its other assets;
  7. Comply with the CMSA (Capital Markets and Services Act);
  8. Treat unit holders fairly;
  9. Establish an organization structure with clear lines of reporting;
  10. Establish risk management systems and controls to safeguard the business trust;
  11. Employ adequate and suitable human resources;
  12. Establish policies and procedures to carry out its functions effectively.

Conclusion

The business trust can conduct business while protecting the business assets through a declaration of trust. The structure ensures that the business interests are protected through the creation of a legal instrument. The trustee-manager will act in the best interest of the unit holders, running the business, while complying with the requirements of the law. The establishment of the business trust as a vehicle for raising funds as a listed entity on the stock exchange means that it is both an investment vehicle while also a business entity.

This article has been prepared to provide general information only, and does not constitute legal advice. Please consult with a lawyer before making any decision or taking any action.

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