Robert Payne, Ince

A ‘trust’ is the legal relationship between one or more individuals, known as a ‘trustee’, who holds assets on behalf of other individuals, known as ‘beneficiaries’.

A trust can be an effective way for you to structure and protect assets throughout your lifetime and beyond. You can achieve several benefits by setting up a trust, including:

1. Consolidation of assets for multiple beneficiaries 

Trusts can allow for multiple people to benefit from assets on an on-going basis. For example, the trustees of a properly structured discretionary trust may hold a family business on behalf of multiple beneficiaries. Upon the death of the original owner, a trust can prevent ownership and control of the business being divided between the different heirs. The beneficiaries may receive distributions of profit from the business, which could continue to operate intact without being fragmented amongst many heirs.

In some jurisdictions, a trust may last indefinitely. Consequently, a trust can provide for multiple future generations of the same family and, in theory, last forever, whilst it continues to provide benefits.  

2. Protection of assets against creditor claims 

A properly drafted and administered discretionary trust, in which no beneficiary has a fixed share (so that each beneficiary may, if decided by the trustee, potentially receive no benefit at all), may provide robust legal protection during a change in the beneficiaries’ financial circumstances.  

For instance, there may be creditor claims if a beneficiary experiences financial difficulties. Trust assets can be fully protected from such a claim if the beneficiary does not have any fixed interest under the trust and has no certain expectation of benefitting. Similar protection may be provided when a beneficiary divorces. 

3. Provide flexibility for complex circumstances

With second and third marriages, children from different relationships and/or assets located in various jurisdictions, a trust can provide a useful framework to deal with complex and changeable family circumstances.

For instance, a properly drafted life interest trust can provide that the spouse from a second marriage should benefit from trust fund income in their lifetime (and they may also have the right to continue to live in the matrimonial home if that is owned in the trust), whilst ensuring that the children from the first marriage eventually benefit from the capital retained in the trust. This means that the surviving spouse is well provided for during their lifetime but the assets will eventually be inherited by the children of the first marriage (most significantly the assets would not be controlled by the terms of the second spouse’s Will at their death but rather by the trust deed).

If you are establishing a trust, you may set out your detailed wishes about how the trust should be managed in a ‘letter of wishes’. This letter can be used as a guide for the trustees when there is need for them to exercise their powers.  Whilst such a letter is not binding, it will be persuasive and trustees will typically need very good reasons to not follow such a letter.

4. Allow trusted family members to control how assets are passed down

A typical concern of those considering setting up a trust is the loss of control over the assets.  However, a trust may allow you as the person setting it up (known as a settlor), trusted family members and/or advisers to monitor the trustees, by what are known as ‘power holder roles’. This means that the ultimate control of family assets can be passed down through different family generations, if the current power holders are satisfied that their successors will manage their powers responsibly (and professionals may be appointed if there are concerns about the succession).

Depending on your objectives and the nature of the trust assets, other provisions may be incorporated. These can include a framework for succession of control of a family business, or criteria to be met by those who wish to be involved in the management of family trusts. 

5. Added value by appointing professional administrators 

Appointing experienced professionals to act as trustees may be very beneficial for the trust.  Such professionals are typically subject to significant duties under the trust documents and the applicable trust law, as well as regulatory obligations, to monitor and grow the value of trust assets and protect the interests of the beneficiaries. 

This could be especially beneficial where there are concerns about the number and nature of the assets involved and/or whether the beneficiaries may struggle to manage the assets themselves (for instance, due to disability, poor financial management or addiction). There may also be a need for regular asset monitoring or other complexities such as potential tax liabilities and reporting, which make the involvement of a professional helpful.

6. Provide tax benefits 

There may be tax advantages to settling your assets into a trust. However, this very much depends on individual circumstances; including the nature and location of your assets and the people that are expected to receive a benefit from the trust.  

For example, in some instances, the income arising within a trust may only be subject to UK income tax once it is distributed. In addition, depending on the circumstances, some assets held within a trust may be exempt from UK inheritance tax upon the death of the settlor.

Nevertheless, this is a complex area and can be difficult to navigate, so you should seek detailed tax advice, relevant to your specific circumstances and needs.  

7. Assist in relation to heirship provisions

There may be other benefits to setting up a trust, which depend on your circumstances and the circumstances of your family. A couple of examples are set out below:

- Certain countries have forced heirship provisions which mean that assets left upon a person’s death must follow fixed rules of succession. If these would apply to you, and you do not want them to do so, then a trust may allow for some or all of your assets (depending on the particular forced heirship rules in question) to pass as you wish.

- Trusts may also be an effective and flexible method for complying with the provisions of Sharia law.

 It is important to consider both the intended purpose of any trust, and your individual circumstances, to best understand whether a trust would be an effective and beneficial solution for you. You should always seek expert advice. An adviser can help you to ensure that all the potential benefits from the trust may be realised (for instance, flexibility and asset protection, such as upon divorce), whilst protecting you and your family from avoidable pitfalls (such as tax charges on additions of assets into trust).