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Using trusts to control the direction of assets

21 December 2016

The use of trusts has been receiving a mixed press recently, but establishing a trust to control the direction of assets continues to offer financial security, reduced tax liabilities and peace of mind for the future, writes Jane Whitfield.

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The root of much of the misunderstanding of trusts seems to stem from the fact that the trust structure has no equivalent in many European jurisdictions. As a result, they do not recognise trusts or fully understand how they work. The general view of trusts among policymakers in these countries (and also in the UK to some extent) is therefore that the trust is simply a clever mechanism for money laundering. However, this view fails to recognise how powerful a trust can be for perfectly legitimate purposes, and also fails to acknowledge the depths of the trust’s roots in centuries of English legal history: For almost 1,000 years, families have been using trusts to preserve and manage their wealth for the benefit of their heirs. Some of the main benefits a trust can provide include:

  • Safety net – asset protection from life events such as bankruptcy or divorce
  • Team around the family – protection for a family member who lacks mental capacity
  • Spendthrift beneficiaries – asset protection from spendthrift beneficiaries
  • University and education – provision of education fees for children or grandchildren
  • Residential care – provision of care home fees for elderly parents or grandparents
  • Tax and succession planning – reduced inheritance tax (IHT) payable on death

The increase of multiple marriages and relationships is adding layers of complexities to the family landscape, with many families now embracing step-parents and step-children as well as half-brothers and half-sisters. Combine this with our ageing population and the resultant growth in care responsibilities, and we end up with strains on both family finances and family interactions. Creating a trust is an effective way of sheltering family wealth, particularly for parents and grandparents who are concerned to ensure that the savings and investments they have worked so hard to achieve will definitely benefit their descendants. But for all settlors (where they are also trustees) the trust remains a unique vehicle to enable them to retain control of what happens to the trust assets and when. Effectively, settlors can give away their property but with strings attached. Another advantage of establishing a trust is that the settlor can dictate who benefits from the trust and when, ensuring assets pass to the ‘right’ people at the ‘right’ time. By contrast, under English and Welsh law, if you leave a gift in your will to your children, the default age at which they will benefit is 18 – unless you state a later age expressly in the will. Even then, if you do state a later age in the will, there could be adverse IHT consequences if the stated age is later than 25. Generally, no such constraints exist with a trust. The signposts advisers should be looking for when considering when to suggest a trust as a possible solution include the following:

  • Control. Does the client wish to give assets away but say who will benefit and to what extent; whether the property may be sold or used for certain purposes and who will benefit from it in the future?
  • Protection. Does the client wish to give away some of his or her wealth to benefit other members of the family, but is concerned that it will be dissipated? A trust can restrict the amount and type of benefit received from the trust assets. For example, a grandparent may want to help his grandson with university expenses, but does not want him to spend the money on a fast car.
  • Flexibility. A trust allows trustees to adapt to circumstances as they arise. If an individual makes an outright gift, they cannot change their mind and give it to someone else. Suppose someone has two adult children: one has highly-paid employment and the other is still studying. With a flexible trust, the income could be used to benefit the child with a low income. If, in later years, if the highly-paid child takes a career break to raise a family, whereas the other child is earning a good salary, the trust income could then be used to help with the costs of raising grandchildren, for example.

Checklist

Ascertaining whether a trust is right for your clients can involve some tricky questions and careful consideration. Our checklist should put you on the right track:

  • If you have children from a previous marriage/relationship, are you concerned about providing for your spouse whilst also providing for your children? A trust could achieve both of these.
  • Are you concerned about a new son-in-law or daughter-in-law as potentially being undesirable to pass money to? A trust could help here.
  • Is there a chance you might die while your children are still quite young? A trust could keep some of their inheritance safe to pay for school fees or simply until they are old enough to be trusted with control of the money.
  • Do you want to leave something for your grandchildren, rather than running the risk of their parents spending it all after you are gone? A trust will protect your wealth and prevent it all from being spent too quickly.
  • Are you worried about sideways inheritance? (For example, a widowed spouse remarries and fails to make provision in his or her will for the children from the previous marriage. In those circumstances, when the remarried spouse dies, the inheritance the children could have received would instead transfer to the new surviving spouse.) A trust stipulates who is eligible to receive any benefit from the trust, so spouses can be excluded from the class of beneficiaries.
  • Do you have any family members who are experiencing specific challenges? For example, mental disability, divorce, bankruptcy/insolvency, business difficulties. A trust will protect both your wealth and the position of the beneficiaries.
  • Are you concerned about meeting residential care fees or being assessed for means-testing purposes for care fees or benefits? It is possible, in some circumstances, for a discretionary trust to shelter assets from means-testing, but this is subject to strict anti-avoidance rules known as the ‘deliberate deprivation’ rules, so caution is needed here.


Jane Whitfield qualified as a solicitor in 2000 and has spent all of her time post qualification in private client and charity law work, currently for Barrett & Co in Reading. She became chair of the Law Society’s Wills & Equity Committee in September 2014, having been a committee member for the previous nine years.