Trusts: A useful tool to protect your family & business

People will come across trusts without even realising it.

Mr. Bennett in Jane Austen’s Pride and Prejudice is desperately trying to find “suitable” husbands for his daughters because the family home is held in trust and can only pass down the male line. If David Copperfield’s father had used a trust, then some protection could have been provided for David rather than him being left penniless after the second marriage and subsequent death of his mother.

So, what is a trust?

There are three parties to a trust:

1. the settlor who puts assets into the trust,
2. the trustees who manage the trust, and
3. the beneficiaries who receive benefits from the trust.

The use of a trust is to transfer assets to the trustees, who then control those assets for the benefit of someone else (the beneficiaries). The person transferring the assets (the settlor) can be one of the trustees, allowing great flexibility and control but without those assets remaining in their own name.

A trust also enables the beneficiaries to have access to those assets, but again without those assets being in their names. This can provide several advantages for the settlor and the beneficiaries; assets can be held in a vehicle outside their names, but with flexibility over control and benefit.

Trusts are generally looked upon with great suspicion, with the perception that they are used by the wealthy to avoid tax and protect that wealth. However, there are thought to be more than two million personal trusts in the UK being used for a variety of reasons, including succession planning, providing funds for education, asset protection, marriage and divorce, protecting vulnerable parties and protecting the family business.

We are all aware of the huge financial burden that has been placed on us due to what has happened over the last 12-18 months. World governments are facing massive financial deficits, and these must be addressed in some way in the future. In the UK there have been recent reports regarding potential changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT), and more are due shortly. It was widely believed that changes would come about in the last Budget, but those reforms were kicked down the road. There are suggestions for aligning the rates of CGT with those of Income Tax and abolishing many of the reliefs for IHT.

It would, therefore, seem to be a very sensible time to consider setting up a lifetime trust to take advantage of the current rates available for CGT and reliefs for IHT.

For example, a class of shares can be created in a business and those shares are then transferred to a trust. The growth in the business is then attributed to the new shares rather than the original shares. If the IHT relief for business assets is reduced/abolished at a later date, then the adverse effect will have been avoided because the value is now held in the trust, but control can remain with the business owner.

Trusts can be extremely flexible and useful. If you would like more information, please get in touch.

Simon Cook is a partner and leads our wills, trusts & probate team. He has 25 years’ experience in his field, specialising in complex estate and tax planning, lifetime trusts and vulnerable beneficiaries, and the creation and administration of personal injury trusts. Simon is also recommended in independent legal guides The Legal 500 and Chambers High Net Worth.