What is the point of trusts?
We are firm believers in keeping things including legal matters as simple as possible. Simplicity creates clarity and clarity is usually cheaper and easier to manage. Nevertheless, there are occasions when simple may not be best and for families concerned about passing wealth down the generations or protecting assets a simple outright gift is not the answer.
What Is The Point Of Legal Trusts?
For example, your child is setting up home with a spouse or partner and you wish to give them a significant lump sum to provide their first home. Or a child wants to setup in business and you want to support the child, but without risking that money being used in the business or taken by creditors.
A trust, very simply, is an arrangement where an individual has a benefit of the asset or money but it is controlled by another person. The person with the benefit is the beneficiary and the person controlling the asset is the trustee.
Trusts are thought to have originated in the early Middle Ages when wealthy land owners appointed trusted associates to look after their assets while they travelled abroad. Trusts are still created today and examples of trusts that we have set up recently are:
- Money being put in trust for children so that after seven years it will no longer be taken into account for inheritance tax purposes, but the children are not yet at a stage in life where they should receive the money outright. A married couple can put £650,000 into trust in this way every seven years.
- Parents providing support to a child for a first house with a new partner. A declaration of trust is created to set out who is entitled to the growth in value of the property and how any sale proceeds are divided. An alternative approach is to advance the money on loan. The loan can later be forgiven but, in the meanwhile it protects the money in the event that the relationship breaks down. A loan may also avoid stamp duty land tax complications.
- Parents providing funds in trust for their child for life with powers to advance their capital at some point in the future. This was to protect the inheritance against relationship breakdown and also to protect against unwise business ventures.
An alternative approach to managing the transfer of wealth down the generations is to create a family company rather than a trust structure. There are advantages in the company approach as it more easily allows the transfer of value through adjustment in share holdings, the company enjoys a lower rate of tax than does a trust, although the end position of the beneficiaries or shareholders may not be much different. It depends very much on the circumstances.
Trust can be used to make more modest payments to children or grandchildren who are under age, thereby giving parents or grandparents control of those funds until the child attains 18. This can be done with the minimum of administrative burden through the use of so called bare trusts.
Where a family has assets qualified for business property relief or agriculture property relief, trusts can be very useful as they allow effective control but without inheritance tax complications as the assets qualify for inheritance tax relief.
There is often talk in the press of using so called asset protection trusts to protect assets from being used to pay care home fees. There are strict rules and any trust set up with the intention of avoiding payment of care home fees can be set aside. Extreme caution is needed in relation to these trusts as most will be ineffective.
In contract an asset protection trust set up in a Will that comes into force when the first of a couple passes away does work if properly set up. There are other inheritance tax planning advantages of trusts in Wills but watch out for the rules relating to the proposed family home tax allowance.
There are also certain specialist trusts associated with particular savings products that allow amounts to be invested, for any capital growth to fall outside an individual’s estate for inheritance tax purposes and for there also to be an option to reclaim some of the capital each year if it is required.
In summary, trusts are complicated and should not be set up without careful thought and being completely clear as to the objectives. Their tax advantages, save for some types in relation to inheritance tax, have largely been removed by successive governments, but they remain a useful vehicle for exercising control over assets whilst waiting to see whether a beneficiary is able to or should receive the assets outright.
With careful planning and careful selection of investments, where cash has been put into the trust, then the ongoing administration and management costs can be kept to a minimum, and management of the trust need not be a burden but a benefit.