Trusts: Not just for the mega-rich and powerful

It is fair to say that trusts often suffer from bad PR. They are often cited in mainstream media with negative connotations attached. You would be forgiven for thinking that trusts are tools reserved for the rich and powerful, with money to burn (or money to hide). But this preconception is misleading as trusts can prove a valuable mechanism within an effective estate plan for us mere mortals too. This article attempts to cut through the “smoke and mirrors” and explain in plain terms what a trust is, and why you may wish to create one.

What is a trust?

A trust exists whenever the legal owners of an asset are different to those who are entitled to benefit from that asset. As a simple example, if person A gives £10 to person B who in turn must hold that £10 for the use and benefit of person C, a trust has been created. It is the separation between legal and beneficial owners that is key to the potential advantages of using a trust structure to hold assets.

Should I consider setting up a trust?

Trusts can offer solutions to a variety of issues and concerns.

1. Vulnerable or disabled beneficiaries or those with learning difficulties

• • Giving assets to an individual that suffers with learning disabilities can have some unsatisfactory consequences.
    If they receive means tested benefits, outright gifts to that person may result in a loss of those benefits.
  • There is a risk that gifted assets are simply applied to cover everyday expenses rather than enhancing the beneficiary’s standard of living.
  • A large outright gift to a such a beneficiary may make that individual vulnerable to influence and exploitation by others. This risk co-exists with the possibility that the beneficiary is incapable of managing their own financial affairs responsibly which could see the funds squandered without the desired benefit being conveyed to the recipient.

By using an appropriate trust, the trustees will be responsible for the correct management of the trust assets. By transferring the legal ownership to trustees, the risks of mismanagement and exploitation are mitigated. Certain types of trusts can also offer protection against the loss of means tested benefits. These types of trusts give wide ranging powers to the trustees to choose who benefits from the trust assets and when; as the disabled beneficiary has no fixed entitlement to benefit, the trust assets are generally excluded from any means tested benefits assessment.

2. Asset protection

A common concern for parents who wish to see their wealth pass to their adult children is the effect that a future divorce may have on any inheritance. A less common issue but just as relevant is the risk of a child being declared bankrupt in the future. Trusts can offer protection from such risks by keeping assets out of the hands of the children. The terms of the trust may allow benefit to be given to the children but only at the discretion of the trustees. This discretion ensures the children have no fixed entitlement to receive the trust assets and it is therefore much harder for those assets to be called upon in any divorce or bankruptcy proceedings. If assets were transferred to the child “absolutely” (no strings attached), they would be vulnerable in the event of such proceedings.

3. Inheritance tax mitigation with control

A common inheritance tax (IHT) planning measure is to make lifetime gifts in an effort to reduce the taxable estate on death. Outright gifts will always carry the risk that the recipient squanders the gift or is the subject of legal proceedings that erode the value of the gift. By gifting into a trust, provided the donor survives by 7 years, the value will fall outside of their estate for IHT purposes on death. A level of control can be retained over how the benefit of the gifted assets are applied, with the trustees taking into account the circumstances and needs of the beneficiaries at any given time.

4. Trusts provide flexibility

Unfortunately we can’t predict the future. Until we can, trusts can offer a solution. A trust can give trustees flexible powers to decide how the income and capital elements of the trust assets are used and applied for the benefit of the beneficiaries. They should do so with the support of a letter of wishes prepared by the person who created the trust (the settlor). This letter provides useful guidance on how the trust should be managed and the sorts of things the trustees should consider when making any substantive decisions.

If a beneficiary has displayed poor management of their own finances, the trustees can decide not to pay trust assets out to them or may decide to make a small distribution instead. Alternatively, if an intended beneficiary has recently come into a fortune by other means, the trustees may decide someone else is in greater need of provision from the trust.

Thinking of setting up a trust? Talk to us

A trust can be incredibly useful tool as part of effective estate planning, but it is a very complex area of law. If you decide to create a trust, it’s essential to get independent legal advice tailored to your own personal circumstances.

The trusts team at Debenhams Ottaway specialise in the creation and administration of trusts with a wealth of experience in the complex legal and tax issues that surround trusts. We would be happy to help you with any questions or concerns you may have.