The word ‘Trust’ has many meanings. In everyday use, ‘Trust’ often means confidence in or dependence. However, in investment and law, the word ‘Trust’ has different meanings. For instance, in investment management, Trust can be used as a vehicle for managing collective investments of various retail investors. The major varieties of such vehicles are ‘Investment Trust’ and ‘Unit Trust’ which are common in ‘Case Law’ countries. But in many laws, Trust signifies a legal relationship in which one person holds property for another’s benefit. This Article focus is on the use and benefits of Trust as a separate versatile legal structure that can serve as effective holding vehicles for family businesses.

The Ethiopian Commercial Code provides legal vehicles such as private limited companies, share companies, partnerships and joint ventures for engaging in the businesses. The Trust law exists as part of the Civil Code 1960? to my knowledge, however; such law is not widely practiced as part of sustaining a family business. Trusts and foundations can play a crucial role in supporting the building and sustainability of a generational family business by providing a structured framework for long-term planning, governance, and asset management. If we practice Trusts as an institutional legal vehicle in Ethiopia, our family business will have significant benefits.

"The existence of a full functioning Trust law in Ethiopia ensure business continuity with disruptions that may result from death of founders and prominent leaders of the business."

Some of the benefits include asset protection, effective governance structure, succession planning; tax planning; confidentiality; philanthropic initiatives. Trusts and foundations can help protect the family business assets from risks such as creditors, lawsuits, and other external threats. By holding the business assets in a trust or foundation, the family can safeguard the business’s financial stability and ensure that the assets are preserved for future generations. 

Trusts and foundations provide a governance structure that can oversee the management of the family business and ensure that decisions are made in the best interests of the business and its stakeholders. This can help maintain continuity, stability, and a clear vision for business across generations. Unlike the governance structure applicable to many publicly owned businesses, the governance structure applicable to family businesses is quite different because of the mix up family affairs and the businesses. There is significant empirical evidence that family business suffers with poor governance structure particularly in the sibling generation. 

Trusts and foundations can facilitate succession planning by outlining clear guidelines for how ownership and leadership of the family business will transition from one generation to the next. This can help prevent conflicts and ensure a smooth transfer of control while preserving the family’s legacy and values. With close observation of some of the prominent family businesses in Ethiopia succession planning is not done timely and many families end up in legal battle. The existence of a full functioning Trust law in Ethiopia ensure business continuity with disruptions that may result from death of founders and prominent leaders of the business.

While the Ethiopian Tax law lacks specific provisions regarding the tax status of Family Trusts, in many countries, Trusts and foundations offer tax advantages that can help mitigate the tax implications of transferring ownership and assets within family businesses. In areas where Trusts hold significant importance, structuring business ownership through a trust or foundation can potentially reduce estate taxes and other tax liabilities.

"Utilizing trust and foundations can foster family harmony by setting clear guidelines for the management and operation of the family business across generations."

Unlike public companies, trusts maintain privacy. Details about ownership, distributions, and family dynamics remain confidential. Trust transparency among the beneficiaries can be conducted through regular family meetings. 

A Family Trust is typically established for the benefit of the family. However, Family Trusts can use the Ethiopian Civil Societies Proclamation that has provisions to register Charitable Trusts, which can serve as a mechanism to engage in philanthropic activities and social responsibility endeavors. By aligning the business with charitable causes and community initiatives, the family can bolster its reputation, foster goodwill, and make a positive impact on society.

Utilizing trust and foundations can foster family harmony by setting clear guidelines for the management and operation of the family business across generations. This approach can help mitigate conflicts, uphold open communication, and ensure alignment among family members with the business’s long-term objectives.

In essence, trusts and foundations serve as a bridge between family dynamics, business continuity, and wealth preservation. They can establish a robust foundation for building and sustaining generational family businesses by providing asset protection, governance structures, succession planning, tax benefits, maintaining confidentiality, engaging in philanthropic opportunities, and fostering family harmony.

Despite the Ethiopian Civil Code containing provisions for Family Trusts/Foundations, these legal mechanisms are not widely utilized by many family businesses and to my knowledge, there is no public sector entity that provide license and register Family Trusts. Consequently, numerous family enterprises encounter conflicts upon the departure of founders, significantly impacting business continuity and affecting both business families and the local economy.