11 May 2018
How A Trust Can Protect Your Family Wealth
Family trusts were once seen as the preserve of rich families or landed aristocrats. But they are increasingly being used by individuals and business owners who want to protect their wealth and assets. They can also be used to determine how wealth will be passed on to the next generation.
A trust is way of managing money, property or other assets. It allows a trustee (such as a family member, lawyer, banker, etc.) to hold assets on behalf of beneficiaries. A trust can be used to protect family assets, or to provide for under-18s or vulnerable individuals. It can also be used for tax planning.
A trust is created by a legally-binding trust document. You need to consider carefully how the trust is structured and set up, because there can be capital gains and income tax implications, although with suitable planning these can be limited if not avoided altogether. There is also a potential inheritance tax charge, and an anniversary charge every 10 years, as well as charges when capital is paid out to beneficiaries. Again, careful planning should mean that these are minimised.
You might be concerned about leaving gifts in your will to a family member who is vulnerable or whose relationship is in trouble. Would the beneficiary use their inheritance wisely? Would it end up outside the family post-divorce?
One solution is to use a discretionary trust. It’s a very flexible way of leaving assets where there is uncertainty about future events. The trust would have a group of potential beneficiaries but none of them is entitled to any defined share in the trust fund – they just have a hope of benefiting. The trustees (who will usually also be the executors of your will) decide who receives what and when. This is the ‘discretionary’ element.
You are able to provide guidance to the trustees by a ‘letter of wishes’ as to how you would like them to exercise their discretion. But it is important (for tax reasons) that the trustees are not bound to follow your letter of wishes. They must exercise their own discretion while taking into account your expressed views.
As with any trust, the trustees have to be chosen carefully, and you must trust them completely.
Notes
For more information on using trusts to protect your family wealth, click here.