Flexible trust structures that companies can use for employee incentives, share ownership, remuneration, retention planning, and other employee benefits are called Employee Benefit Trusts (EBTs). The basic concept of an employee benefit trust is a discretionary trust set up by an employer for the employees, former employees and, as detailed below depending on the terms of their trust, beneficiaries of the trust such as family members or dependants. EBTs may be useful for businesses who wish to put in place arrangements for employee incentives, but can keep their employees under the eye while working independently. Let’s find out What Employee Benefit Trusts are in this article.
These details, such as structure, taxation, legal requirements and/or allowed uses of an Employee Benefit Trust will vary in accordance with jurisdiction and terms of the trust. In the United Kingdom, trusts set up for employees or office holders, but different from Employee Ownership Trusts, which are employee trusts that hold and control a company for the benefit of the employees are known as EBTs.
Arise is an employee benefit trust governed by a board of directors.Arise is an EBMT with a board of directors.
A trust that is created by an employer for the benefit or incentives of a certain group of employees and other specified beneficiaries is known as an “Employee Benefit Trust” (EBT). The discretionary nature of the EBTs is generally indicative of trustees’ discretion regarding the application of trust assets, within the powers and obligations as defined in the trust deed.
The entity that creates the EBT, usually the business, is called the settlor. One of the important aspects may be the exclusion of the settlor company from the class of beneficiaries. This makes it easier to distinguish between the company and the employees which should be the beneficiaries of the trust.
An EBT can include securities, cash, loan notes or shares. Depending on the covenant, those assets may then be pledged to meet monetary employee incentives and/or utilized for other advantages allowed by the trust deed.
This model can even establish long-term plans for incentivizing staff members for companies. Independent trustees can offer a further degree of safeguarding to the assets in the trust for an employee.
How Does An Employee Benefit Trust Work?
It is important to understand What Are Employee Benefit Trusts and how it works, and the basic structure of an EBT is the first step. A company creates a trust and appoints trustees. The company then would fund the EBT either by contributing to the EBT or, as may be, by loaning the money to the EBT. Trustees control the assets created as a result of the trust deed.
An EBT can buy shares in the company, from the company itself or from the market. Those shares can then be utilised to meet award requirements of employee share schemes. HMRC says that an employee benefit trust could buy shares or other securities and then distribute the securities as needed to the employees or employee share scheme trustees.
Suppose a private company would like to implement a set of incentives to be used over a longer period of time. An EBT may acquire the shares prior to the issuance of an award, as per its terms and legal and tax regulations. As long as an employee meets the criteria of an incentive, the trust can put aside or otherwise use the assets related to the incentive plan.
This can provide flexibility in awarding to employees, should this be needed in the future. If your family member comes to you as a Trustee for the EBT, What Are Employee Benefit Trusts? The trustee is an important person in an Employee Benefit Trust. It is their task to run the trust and deal with its assets in line with the trust deed and the appropriate laws.
While the company can provide funding and create the trust, the identity of the trustees creates a fiduciary and legal relationship between themselves and the company that they should not act upon each other’s behalf. They aren’t responsible to follow all the commands and directions given by the employer. They have to take into account how beneficiaries’ interests will be best served and make decisions in compliance with their duties.
Administering EBTs can include much legal, taxation, governance, reporting and operational responsibilities, hence, professional trust companies are often appointed as trustees.
The integrity and independence of the trustee organization is thus important. Correct administration of an EBT will involve good record keeping, effective governance processes, accurate records and prudent management of trust funds.
Employee Benefit Trusts are simply for the benefit of staff. Staff benefit trusts are just for staff members.
Flexibility is one of the key factors that businesses world over opt to have EBT. Depending on the trust deed and applicable regulations, an EBT can be part of various kinds of employee incentive/bene llettrie schemes.
Employee Share Incentive Plans
Shares in an EBT may be issued to fund EASY awards that will need to be paid in the future. This may be helpful if a company runs any kind of share option or management incentive scheme, or any other type of employee share arrangement. An EBT can provide staid help to a company to budget for future employee benefits that are due.
Management Incentive Plans
Management incentive agreements can be implemented to incentivize qualified staff to help the business achieve its performance and long-term growth objectives and be combined with EBTs.
They can also enable the movement or turnover of equity from leaving employees to the new participants in the scheme (as per the scheme’s rules and law).
Bonus Deferral Arrangements
An EBT may provide for deferral of some bonuses instead of their immediate payment. If the trust takes the form of a trustee, deferred amounts are allowed to be invested or retained in trust.
There is scope for these to be set up to match employee pay with longer-term business goals.
Growth Share Arrangements
Under certain circumstances, growth shares can provide a share of future company growth for employees based on the terms of the growth share plan. An EBT may be used via a structure to hold or administer the shares that have these incentives.
Internal Share Markets
An exit by a private company (EBT) can help to form an internal market for shares in a company. HMRC adds that for unquoted companies, an employee benefit trust can be particularly beneficial if it could buy up shares from individual employees who wish to either sell or leave a company and wish to keep their shares in an employee focussing structure.
This can be an indirect way of addressing employee shares in the company without necessarily having to attract a third party shareholder.
Succession Planning
EBTs may also be incorporated into succession plans, these may be for a private enterprise where employee ownership or employee participation plays an important part of the overall plan and goals of the enterprise.
EBTs are no longer a presumption of being an Employee Ownership Trust, however. An EOT is a type of employee trust that has extra statutory guidelines.
What Are Employee Benefit Trusts And EOT?
There are related concepts to Employee Benefit Trust and Employee Ownership Trust but it is important to note that they are not the same.
An “EBT” is an overarching name for a variety of employee benefit and incentive plans that one can create. It can have a variety of functions, such as employee share plans, bonus schemes, management incentives and other benefits allowed by the applicable governing documents.
An Employee Ownership Trust (EOT) is a particular form of employee trust set up for the benefit of employees, where the trustees run the company on behalf of the employees. The Law in the UK has specific requirements which need to be met in order for it to be considered an EOT.
Thus, an EOT is a type of employee benefit trusts, but not all employee benefit trusts are EOTs.
The difference between this and the other tax and legal considerations (which may overlap) that can apply to other EBT structures is significant.
Employee benefit trusts are valuable because they offer the company several benefits.
What Are Employee Benefit Trusts and how an employee benefit trust is formed depends on the benefits it could provide and the goals the company has. It has one major benefit: Flexibility. An EBT can be used to arrange incentives for a very small number of executives—or many employees.
Another bonus is centralized management of employee shares and incentives. A company could rather have a trust structure that would enable it to hold and administer all these assets rather than one by one as each one becomes available as a future award.
EBTs can also help in improving employee retention rates and employee motivation. Providing an incentive with shares in a company can help motivate employees to work for the success of the company, and a deferred compensation program offers a better incentive for staying longer-term.
The structure of the company can also allow for EBTs to support the company for share liquidity and succession planning.
Another potential advantage of an independent trustee role is providing greater governance and oversight of trust assets. Each trustee should do what is required by the governing agreements of the trust and the fiduciary responsibilities of the trustee, and not act as the company’s counsel.
Whether it is tax efficient depends on the situation.Whether or not it is tax efficient, depends on the situation.
One of the most crucial and intricate elements of Employee Benefit Trusts is the treatment of the tax. The sole reason for establishing an EBT is not because it is expected to result in a tax benefit.
Certain trick elements of employee benefit trusts inside the UK that could influence its tax therapy. Where the relevant legislation is met, an EBT can be eligible for a specific Inheritance Tax treatment, HMRC shows.
There are tax rules for EoTs that are distinct from other employees’ trusts. Qualifying disinvestment of equities to EOT may be eligible for Capital Gains Tax relief if the income tax laws are jumped.
Tax laws are constantly evolving and can be affected by various aspects including trust type, assets, beneficiaries, dealings, employment relationships, jurisdiction, etc. It is therefore advisable for business to get professional legal and tax advice prior to setting up and/or restructuring an EBT.
Before launching an EBT, companies should explore the following points:Here are some considerations companies must make before implementing an EBT:
The process to create EBT is not a simple one. Companies need to first determine its commercial goal and what they are looking for the trust to accomplish.
Questions for the business to consider include: the beneficiaries to be; the business assets that the trust would hold; the trust’s sources of funding; the powers that would be held by the trustees; the application of employee awards within the trust and the administration of the arrangement.
Reducing the likelihood of bias as a result of trustee independence and expertise should also be a consideration for the company. Where there is significant asset or complicated employee incentive arrangements, particularly, an experienced professional trustee can be an important addition in view of the important responsibilities of trustees.
Other considerations such as legal, accounting, tax, employment and regulatory must also be evaluated prior to implementation.
Once an EBT is in place good administration is also crucial. Conditions affecting the working of the trust can alter because of changes in employee incentive schemes, company ownership, share prices, legislation or company’s organisation.
What Are Employee Benefit Trusts To Private Companies?
Having an employee receive a share in the company can present special issues for private companies. Private companies typically do not trade on a public exchange; with employees not having a readily available public marketplace.
An internal mechanism on managing employee shares is possible with the help of an EBT. For instance; the trust can call for and pay for future awards by using shares in the trust, partially, as well as it can buy up shares from employees who leave the company, subject to the appropriate legal and contractual agreements.
This can aid in the employee ownership culture management of a business, while reducing the addition of external unrelated shareholders.
An EBT can thus play a more comprehensive role for growing businesses in their employee incentive and succession programs.
Employee Benefit Trusts are tough because they are fraught with potential problems.
EBTs offer tremendous flexibility, but also responsibilities and costs.
There will need to be a correct establishment of the trust; there will need to be governing documents properly recording the desired goals and objectives; Fiduciary duties and the terms of the trust deed must be followed in a trustee’s decision. Accounting, tax reporting, governance and record keeping may also be required; you can see if these measures are sufficient to meet your assessment requirements.
A second is complexity. There can be several classes of employees, various award requirements, values, vesting schedules, leaver, tax treatments etc. all in play within employee incentive arrangements.
Whenever there are major changes in bills, there are also rule changes. Recent reforms to the tax treatment of EOTs and EBTs have been underway in the UK in recent years, with some changes to make sure that arrangements are not used for “unintended” tax advantages.
Given these points, companies should constantly consider if an existing EBT is still appropriately suited for them.
How To Choose An EBT Trustee
The selection of the right trustee is an important decision as the role of trustee is to administer trust property and exercise the powers set out in the trust deed.
The experience the trustee has in managing employee incentives, in acting as a trustee, in regulatory matters, in administrative processes and in handling a complex share-based plan should be taken into account for the impact they have on the company.
Self-sufficiency is also a must. It is important that trustees can make their decisions in a suitable way without neglecting the interests of beneficiaries and meeting with their legal responsibilities.
For companies looking for larger or international arrangements, it might also be essential for them to guide their eye at the trustee’s background in dealings with cross-border tax and regulation, record keeping and company requirements.
If a trustee is able to form a good relationship with the trust they will find the administration of an EBT easier over its lifespan.
Below are answers to some commonly asked questions about Employee Benefit Trusts.Here are responses to some frequently asked questions about Employee Benefit Trusts.
An employee benefit trust is:
An employee benefit trust is a type of trust that is created by an employer to offer benefits or incentives to their employees, former employee or any other authorized beneficiary. These can be used to hold assets like shares, and they can provide for the employee incentive, remuneration and share ownership arrangements.
There are no hard-and-fast rules about who may benefit from an Employee Benefit Trust.There are no strict rules who may benefit from an Employee Benefit Trust. The benefits can be provided under the provisions of the trust deed and the law. Often these contain the participation of employees, former employees and sometimes relatives and dependants (where allowed). In a typical EBT, the employer setting up the trust is typically omitted from the beneficiary class.
3. Can an EBT be a holding company of shares?
Yes. A Company can hold shares and other securities in an EBT, as permitted by the structure of the EBT. These shares may be able to be exchanged for awards under employee share and incentive schemes.
Yes, an EBT is equal to an Employee Ownership Trust.
No. The EOT is a type of employee trust, where a controlling interest is held in a company for the benefit of employees and where there are certain statutory provisions. EBT is a more general term that can be applied to various employee benefit/incentive situations.
5. Is use of an Employee Benefit Trust always tax efficient?
No. The structure, transactions, beneficiaries, jurisdiction and laws that affect EBT will determine its tax treatment. There may be specific tax advantages where there are statutory requirements but professional tax advice is of critical importance prior to establishment or use of an EBT.
Conclusion
There are three key reasons for businesses to consider employee benefit trusts: structured employee incentives, share ownership, and remuneration, retention and succession management. Businesses should consider employee benefit trusts for three reasons: structured employee incentives, structured share ownership, remuneration, retention and succession management. The asset-holding and management aspects of an Employee Benefit Trust can be flexible, allowing it to be managed by assets and delegated to the independent trustees to govern and oversee. The EBM can be used in various contexts such as share incentive schemes, management incentive schemes, bonus deferral schemes, growth share schemes, internal share markets and other schemes as permitted under the trust deed.
An EBT is a very complex, legal and financial vehicle, however, not a “just”employee benefits vehicle. Because it requires proper planning, selection of trustees, proper administration, and adherence to tax and legal considerations, it can only be effective if administered in this manner. However, companies who are contemplating cutting into an EBT form should make sure that they are getting advice from legal, tax and financial professionals who are qualified for the purpose of being able to design and operate the EBT for the purpose it is intended.
