Trusts as a concept is known to most people but it is often feared or misunderstood.
What is a Trust?
A Trust is a vehicle, a box, or a notional bag, into which assets are placed by the creator (named the ‘settlor’ for lifetime trusts or ‘testator’ for Will-trusts). Another way to look at the box is an ‘avatar’ of the person creating the Trust. That avatar is a person that exists from the creation of the Trust and lives (in law) for up to 125 years after the creator’s death. It is a way of a person exercising an element of control of the destination and use of their estate after they have died. People (trustees) control the ‘avatar’ according to the wishes set down by the creator. The avatar receives the assets given to it by the creator and then passes them to people or charities (being beneficiaries).
So, how and why does the need to create a Trust most commonly arise? Robert Cartmell sets out below the main reasons.
Reason 1. Protecting estate for children against future changes in Will by the surviving spouse
This is the number one reason and most common. It is to ensure ‘successive’ inheritance. In other words, to help achieve the basic concept of a husband or wife wishing to ensure that the children end up receiving their share of the estate in the event of them pre-deceasing their spouse. A Trust is vital to ensure that protection. Without it, a surviving spouse is free to change his or her own Will and to leave the estate (combined with the 1st spouse) elsewhere, such as a new partner or spouse.
Reason 2. Protecting against attack on assets by other persons (divorce and bankruptcy etc)
A beneficiary receiving inheritance as an outright gift is often less advantaged than by receiving the inheritance as (say) a loan from a Trust. A loan might better protect the value passing to the beneficiary in the event of an ‘attack’ on the beneficiary’s own estate. Common issues arise on divorce or insolvency. Where statistically one in every three marriages ends in divorce, for parents making their Wills they are concerned where say they have three children and do not know what the future holds for them. As a first step, consider the Will-Trust as part of basic common sense estate planning to provide flexibility and possible protection against such an eventuality.
Reason 3: To Protect a Vulnerable Beneficiary
As an example, if you wish to benefit your children’s equally but one of them is subject to disability or is ‘poor’ with handling money, you can use the Trust to provide protection for them. The protection is according to your requirements and wishes. You can provide for a steady income to be generated for them or capital to be released only in small quantities and by loan rather than gift (for further protection). It is a very popular way of ensuring that a vulnerable beneficiary can still benefit properly and fully from your estate in circumstances where making an outright gift to them would seem impractical.
Reason 4: Giving to Charities without undue problems for your Executors
Ideally, any substantial gifts to charities should be given via a charitable discretionary trust structure. What is substantial depends on the estate and the person setting up the gift. But, say, you wish to give £100,000 to a registered charity, by placing the gift into a discretionary trust structure gives the trustees more flexibility on ensuring that the charity benefits properly and fully. The trustees can act according to a set of wishes you may prescribe as to use – and furthermore the charity can place less pressure on the trustees.
Reason 5: Consider using a Trust for gifting Business Assets
If you own a share in a trading Business, that asset might be IHT exempt. When making your Will, make sure to take advice on placing those shares into a Discretionary Trust format. Not only is the structure effective in terms of succession planning, it can offer tax benefits for children or family ultimately inheriting.
Laws and interpretation of them change regularly. Agree a plan of how and when you will review matters with your Estate Planning advisor (myself) and your Financial Advisor. A regular annual review is ideal in most cases and helps to identify areas not previously covered or which have changed.
If you would like help or advice from Robert Cartmell on the issues raised in this article, please get in touch. Email Robert Cartmell Consulting at info@robertcartmell.co.uk to make an enquiry or arrange a discussion.