Corporate trusts, sometimes referred to as business trusts, are legal entities that help a company manage specific assets, investments, and transactions. These tools are typically used to govern a wide variety of business activities on behalf of beneficiaries. Because of the complexity of these financial instruments, having experienced legal counsel is essential to establishing and managing corporate trusts. Count on the Business & Corporate Law team of SederLaw.
What Is a Corporate Trust?
A corporate or business trust is a legal arrangement by which designated individuals or companies, known as trustees, are given the power to administer a group of assets. These trusts are often but not necessarily used by banks that act in a fiduciary capacity to manage securities investments. The trust document itself contains information such as the identities of the beneficiaries and trustees, as well as the terms and conditions of the trust agreement.
Corporate trusts are generally established for the benefit of the businesses that create them. Non-incorporated businesses can also use trusts to gain some of the benefits of a corporation without the need to incorporate. For example, a Massachusetts business trust is considered to be an association by which property is held and managed by several trustees. These trustees act for the benefit of beneficiaries, who hold an ownership interest in the trust property.
The Roles of Trustees and Beneficiaries
Under Massachusetts law, trustees control and manage the trust. The trustee acts as a fiduciary, which means that the person or entity serving in this role must make decisions that are in the best interests of the beneficiaries. Beneficiaries, who hold ownership shares of trust assets, are not allowed to participate in the management or control of the trust business. Doing so could jeopardize the limited liability afforded to them by the corporate trust. The trust itself is a separate legal entity that can be sued for various civil claims.
Purposes of a Corporate Trust
Corporate trusts are created to carry out a multitude of different business and financial objectives, including:
- Issuing debt: Corporations that issue bonds and other debt securities frequently create trusts to do so. A trustee is appointed to represent the interests of the beneficiary bondholders. The principal roles of the trustee are to make sure the debt issuer abides by the terms and conditions set forth in the bond agreement and that interest and principal payments are processed.
- Managing employee benefit plans: Trusts are used to administer pension funds, retirement programs, and other employee benefit plans. Using a trust helps assure employees that their interests are protected, in particular, that assets that are set aside for these plans are wisely invested and distributed to participants as the law requires.
- Securitizing transactions: Corporate trusts are integral to securitizing transactions. For instance, a trust may be created to hold and manage a pool of assets such as loans, mortgages, and credit card receivables on behalf of investors. The trust will issue securities that are backed by these assets while the trustee administers cash flows and payment distributions.
- Facilitating escrow services: Escrow agents are essential components in such varied business deals as real estate transactions and mergers and acquisitions. A corporate trust can serve in this capacity. It can hold funds, assets, and other items in escrow until specific conditions have been met, at which point they are released and distributed to the appropriate parties.
- Managing investment funds: Mutual funds and exchange-traded funds (ETFs) are sometimes managed by a corporate trust. The trustee will be responsible for overseeing the assets in the trust and ensuring compliance with the various regulations that affect these funds.
- Assisting with bankruptcy: Companies that declare bankruptcy may have a corporate trustee appointed to help with the process. The trustee will usually be responsible for distributing assets to creditors and shareholders as directed by the bankruptcy court and in accordance with the law.
How To Create a Corporate Trust in Massachusetts
Following the correct procedure to establish a corporate trust is essential to accomplishing the above and other goals. Working with a business and corporate law attorney, you will take these steps:
Create the declaration of trust. This document establishes the corporate trust. It should address the following, among other matters:
- The name, date, and purpose of the trust
- The trust’s principal place of business
- The identities of the trustees
- Provisions for removing and replacing trustees
- Terms concerning the authority of the trustees
- Liability provisions for stockholders and trustees, including indemnification
- Provisions related to shares of beneficial interest, including their transfer
- How the trust may be amended or terminated
- Statement of the governing law
Record the declaration of trust. The trustee will record the declaration with the secretary of state and registry of deeds in the city or county in which the trust is located. A filing fee must be paid at the time of recording.
Record amendments. If amendments are made to a filed trust, the trustee should record them (generally within 30 days).
Annual reports. For each year in which the corporate trust operates, a signed report must be filed with the Massachusetts secretary of state. The purpose of the report is to verify:
- The name of the business for which the trust exists
- The business’s primary location
- How many issues of outstanding certificates of participation or shares does the trust has
- The names and addresses of the trustees
Contact Our Worcester Corporate Trust Attorneys
A knowledgeable attorney can assist with other aspects related to creating and managing trusts, including litigation proceedings if needed. Our firm’s practice covers numerous areas of law, which allows us to take an interdisciplinary approach to handling all aspects that arise with respect to corporate trusts. Connect with SederLaw’s Business & Corporate Law team to learn more today.