Why use a Trust

This article explains the key reasons why people use trusts during their lifetime and on death.

Trusts are mainly used to pass assets and wealth down through the generations. Trusts have been used for many years to protect assets, control their management and to control how, when and if the assets are transferred to beneficiaries. Tax is also an important factor and trusts can be used as part of Inheritance Tax (IHT) planning.

Control

The person that sets up a trust (settles assets on a trust) is called the settlor. Often the settlor of a lifetime trust will appoint themselves as a trustee and this enables them to retain control over the assets. Alternatively, they may appoint a friend or relative or a professional in lifetime or in their Will alongside a letter of wishes detailing how they would like the assets dealt with.

Using a trust allows the settlor to postpone gifting the assets directly to any specific beneficiary enabling the settlor to retain effective control over the ultimate destination of the assets and the timing of any outright gift. The trustees can appoint the assets to a suitable beneficiary when they see fit.

The ability to retain control can be particularly helpful in the context of a family business. The use of a trust can allow the founder shareholders to transfer their shares to a trust as part of their succession planning. If they appoint themselves as trustees, they will retain voting control of the company while having removed the value of the assets from their estate.

It is possible to reserve some powers as settlor, but the greater the extent of these, the more risk that the trust will not be effective. This is because the settlor will not have made an effective disposal. In this case, the trust would be void. Where a settlor wants to retain powers over the trust (other than where they are acting as trustee) then careful legal advice will need to be taken to ensure that it is an effective gift.

Protection

The nature of a trust is that the assets do not become the property of the beneficiaries but are held by the trustees on their behalf. The trustees are responsible for managing the assets and have a duty to protect and preserve trust property. Trustees have powers to determine the timing and amount of the beneficiaries’ entitlements. A trust can therefore be used to protect assets and income from being dissipated by beneficiaries. A trust may, to an extent, protect assets from a financial relief claim on divorce but this will depend on the circumstances and the family court will consider all the available resources of the parties to the marriage, including trust assets. A discretionary trust would provide more protection than a trust with a life interest.

Typical reasons why you may not want the beneficiaries to acquire outright ownership as they need protection of a trust include concerns about:

• the age of the beneficiaries who may be too young (or perhaps too old) or too inexperienced to be the outright owner of the assets
• beneficiaries being too vulnerable to handle the assets (eg beneficiaries who suffer from a disability or incapacity, beneficiaries who are too easily and possibly inappropriately influenced by others or beneficiaries with addictions)
• a possible divorce, though a trust is no guarantee that funds will be protected from a financial claim in divorce proceedings.
• financial difficulties including possible bankruptcy of a beneficiary

Flexibility

Making a gift into trust rather than absolutely to an individual permits far more flexibility.

Different people can be entitled to income at different ages and at different times as the trustees see fit.

Capital can be appointed to the beneficiaries absolutely at the trustees’ discretion and can be staggered over time, appointed all at one time or never appointed at all.

Unlike with an absolute gift, decisions as to who benefits from income and capital and when can be made by the trustees as the circumstances dictate far into the future.

Often a life interest trust will be set up in a Will for a second spouse so that they are able to benefit from the income and use of the assets during their lifetime, but the capital will pass to the children from the first marriage on the spouse’s death.

Secrecy

Trusts can aid secrecy where this is considered necessary though this is more complex for Will trusts.

Public ownership records such as the Land Registry and Companies House records will show the legal owners, who are the trustees. If the trustee is a trust corporation then this provides another level of anonymity.

The deed is a private document, though beneficiaries are entitled to see it. A trust set up in a Will will have its terms published when probate is granted. Settlors should be aware of this and might prefer to set up a pilot trust in their lifetime with £10 which contains the details of the trust beneficiaries and its terms. In their Will they then leave a gift to that trust. Nothing is then disclosed about the beneficiaries or the trust terms in what will become a public document.

Though it is possible to provide secrecy from the public, full details will need to be supplied to HMRC under the Trust registration Service (TRS)

Tax planning

Lifetime gifts to most trusts are immediately chargeable to IHT (other than gifts to a disabled persons trust) and will suffer a tax charge at the 10-year anniversary and on exits, at a maximum rate of 6%. However, trusts can still be useful for tax planning purposes in some situations in lifetime including:

• removing £325,000 from an estate every seven years
• removing fast appreciating assets from an estate so that the growth is captured by the trust
• being created annually by normal expenditure out of income
• to pay school fees in a tax efficient way where set up for grandchildren
• to defer a capital gain on gifting an asset into the by using the gift holdover reliefs.
• in company succession planning

The tax consequences of setting up a Will trust are less complex as the IHT is paid by the estate before the trust is created and assets are rebased on death.

A lifetime trust will pay income tax at the rate of 45% and on dividends at the rate of 39.35%. A trust distributing all of its dividend income in full will suffer tax pool charges.

Get in Touch

Our private client tax team supports individuals and families with structuring assets, managing residential
and commercial property portfolios, and making complex tax and compliance matters easier to navigate. We also provide clear guidance on succession and inheritance planning, always tailored to your circumstances and long term goals. Contact us today to discuss your personal situation and discover how we can help you preserve and protect your wealth with confidence.

Disclaimer: Please note that this document is not intended to and nor does it provide any form of legal advice and should not be construed as doing so.  It is designed to alert clients of some of the issues and is not intended to give exhaustive coverage of the topic.  Professional legal advice should always be sought before action is either taken or refrained from, as a result of information contained herein.