The power of trusts: an effective planning tool for safeguarding and passing on wealth
Trusts have emerged as powerful planning tools, offering a range of advantages for passing on or safeguarding wealth. From structured succession to tax deferral, trusts provide flexibility and control over assets, ensuring the settlor's intentions are honoured while protecting beneficiaries.
In this article, Tracey Neuman – Private Client Executive, delves into the key benefits of trusts in the UK, highlighting their significance in areas such as business succession, divorce protection, creditor protection, philanthropy, and dispute minimisation.
Why are trusts a good idea for passing on or safeguarding wealth?
There are several reasons why trusts are effective planning tools and can provide many benefits to the settlor and the beneficiaries.
1. Structured succession
Trusts can be drafted in many different ways for a variety of reasons. This means that the settlor will have greater insight into how provision can be made for different beneficiaries.
By way of example, the settlor may wish to specify that capital payments are not made to beneficiaries before they reach a certain level of maturity or only for certain purposes. But it is also possible to have different funds within the same trust such that some beneficiaries receive regular distributions and others have their provisions accumulated.
It is this flexibility that makes trusts attractive and allows for guidance to be provided to the trustees via a letter of wishes. Letter of wishes can regularly be updated to reflect the settlor’s current thinking, which may vary depending upon the asset balance at the time or the age of the beneficiaries.
2. Business succession
For entrepreneurs, a key question is what happens to the business once they are no longer around. Historically, many businesses have been passed to the next generation, but the next generation may not be best placed to manage the business.
If the business is owned by a trust, it would be the trustees who would decide whether the business should be sold. They may in certain circumstances have a degree of control over the appointment of key individuals in the business. Structuring in this way should remove emotional considerations and allows a greater degree of practical and commercial thinking about the running of the business.
3. Divorce protection
Trusts, particularly those in the offshore jurisdictions, can offer a degree of asset protection on divorce. The principal reason for this is that the trust assets do not belong to the settlor or any of the beneficiaries.
The level of protection offered will depend upon the terms of the trust; the class of beneficiaries and the level of benefit previously provided to a divorcing beneficiary.
4. Protections for vulnerable beneficiaries
There may be a number of reasons why an individual should not be managing their own finances. This could be because of a disability, for example. In this situation, the trustees would manage finances on behalf of the individual, by meeting their expenses and/or providing a home or care for them.
5. Tax deferral
Historically, trusts have been used for tax planning. Many of the advantages have been removed, but some remain. Depending upon the status of the settlor, trusts could provide inheritance tax protection, as well as tax free roll up until such time a beneficiary receives a benefit from the trust.
6. Creditor protection
If a trust is set up by a settlor when they are not in danger of defaulting on a debt to a creditor, and if the transfer of assets to the trust does not lead to such a risk, then the trust's assets cannot be reached by the settlor's creditors at any later point in time. As a result, trusts could be used to hold rainy-day funds for the family.
The trust’s assets do not belong to the beneficiaries, a beneficiary’s creditor would have no claim on these assets.
7. Philanthropy
For families with significant wealth, there is always a question as to how to introduce the next generation to the family wealth. Families often set up trusts for charitable purposes to encourage the next generation to engage with the wealth by making recommendations to the trustees as to which charities should benefit.
8. Dispute minimisation
As families move through generations, not only does the size of the family normally grow, but so do the varying attitudes towards wealth. By holding the family wealth in a flexibly drafted trust it is often possible to make provision for different groups of beneficiaries in different ways. This could be informally or by dividing the trust into different funds.
Ultimately, by providing this flexibility trusts can be tailored to the needs of specific groups of beneficiaries, which can significantly reduce the risk of conflict between different branches of the family.
In summary
In an ever-evolving landscape of wealth management, trusts have proven to be invaluable instruments for preserving and transmitting assets. With the ability to cater to the diverse needs of beneficiaries and mitigate potential conflicts, trusts offer a strategic approach to wealth transfer and protection. By harnessing the potential of trusts and leveraging their unique features, individuals and families can confidently navigate the complexities of intergenerational wealth, securing their financial legacies for generations to come.
What is a trust?
A trust is a legal arrangement which exists in many jurisdictions where typically one person (a settlor) transfers assets to a trustee, who accepts ownership of the assets not for his or her own use and benefit but for the benefit of others (the beneficiaries).
Usually, a trust is constituted in writing in the form of a trust deed which will set out the manner in which the beneficiaries can benefit from the trust, as well as the powers and duties which the trustees will have in administering the trust and its assets.