Family and Asset Protection
Family and Asset Protection
Simply put, a Trust is a legal relationship whereby a person gives property to another to hold for the benefit of someone else. A Trust is therefore a way
of managing assets.
Trusts are very common and play a key role in many aspects of everyday life. Many people, often without realising it; will come into contact with a trust in one form or another at some point during their lives. Yet trusts are widely misunderstood and often seen as something just the wealthy need to be concerned
But trusts are particularly useful when planning how money and assets should pass from one generation to another, especially when family structures are complicated by divorces and second marriages. This; coupled with the growing frequency of marriage breakdowns, an ageing population and rising prosperity; make trusts an excellent tool for long-term planning to ensure a family’s financial stability and security.
A Trust can be created during someone’s lifetime or upon their death. This booklet looks at Lifetime Trusts.
There are three parties involved with the creation of a Trust, the Settlor the Trustee and the Beneficiary.
The Settlor (the original owner of the assets and the person setting up the Trust) will transfer their assets to the Trustee (the person or persons trusted to look after the assets) who will be instructed to hold and manage these assets on behalf of the Beneficiary (the person or persons the Settlor would like to benefit from the assets).
This can be useful when the Settlor would prefer not to gift their assets outright to their Beneficiary. All the terms, conditions and details are outlined in a Trust Deed created by the Settlor.
Before a Family Trust is created steps should be taken to ensure that the Settlor (the person creating the Trust) is mentally capable of making such a decision and fully understands the scope and nature of their assets and the implications of creating a Trust.
The Trustee is the person or persons named in the Trust Deed to look after and manage the assets held in the Trust. The Trustee will effectively become the legal owner of the trust property.
The Trustees will have certain powers provided by law to allow them to manage the assets in the Trust effectively for the benefit of the beneficiaries. The Settlor will also be able to outline their wishes and provide powers in the Trust Deed.
Although the trust fund is transferred into the name of the trustees, it doesn’t belong to them. They are looking after it for someone else and have what is known as a fiduciary duty to the beneficiaries.
This means that the relationship of trustee and beneficiary stems from trust. The trustee has the following duties:
Trustees must follow certain statutory rules, as well as any terms outlined in the Trust Deed. In general, most things which a person should or would want to do with their own money or assets can be done by the trustees. For example, trustees can open and operate a trust bank account, invest money and buy and sell property.
However, the trustees should always seek the appropriate advice before making any of these decisions. The role of a trustee should not be undertaken lightly. Trustees can be held personally liable for any mistakes they make and a trust will often continue for many years (to a maximum of
125 years) known as the perpetuity period.
For these reasons, settlors will often choose to appoint professional trustees.
Any person over the age of 18 who is of sound mind and who is not subject to any bankruptcy order may be appointed as trustee. It is advisable and sometimes a legal requirement to have more than one trustee; except from where a Trust Corporation is appointed in which case they can act solely.
You will need to choose your trustees wisely and be satisfied that they have the capacity to undertake this role and the responsibilities which accompany it. You do not have to appoint a professional trustee but you need to be extra careful to whom you give the power and responsibility of trusteeship, bearing in mind that the trustee becomes the legal owner of your assets.
Because a trust separates the legal ownership of an asset from the beneficial ownership, it means that a settlor of a trust can be a trustee, but they must act in the interests of the beneficiary and not themselves.
Beneficiaries can be appointed as trustees but this can often create a conflict of interest and it is usually advisable to appoint independent trustees, who have no beneficial interest in the trust.
A professional trustee provides continued stability, professionalism and investment proficiency.
Disclose any circumstances where they might have a conflict of interest with a beneficiary. If a beneficiary owes a trustee money, this should be disclosed.
Ensure that all the trust assets are transferred to them and that these assets are protected. Trustees must also ensure that trust assets are kept completely separately to their own assets.
Not act in conflict with the interests of the beneficiaries or profit from their role as Trustee.
Ensure they know what the terms of the Trust are and that they are carried out and that they do not act beyond the terms of the Trust and their powers given by it and those given by law.
Act impartially and fairly between multiple beneficiaries and those who are beneficiaries now and those who will be in the future. Undertake regular meetings and to consider the beneficiary’s individual needs.
Take independent financial advice at appropriate times. This does not preclude the use of common sense. The Trustees must also ensure that the advice taken is in accordance with any legislative provisions. The ultimate decision over what to invest in is the Trustees’ decision. It cannot be delegated.
Trusts continue to provide practical solutions to problems in ordinary peoples’ lives:
Future financial difficulties of the beneficiary:
The beneficiary of a gift will own the asset outright and it will form part of their estate. This means it could be taken into account in the event of any future bankruptcy or insolvency process and may be lost to creditors. There are also other, more common, financial pressures. The beneficiary may become unemployed, or could be forced to take a pay cut or they may fall ill. As a consequence, this might make them feel pressured to sell the assets in order to consolidate debts or to help their financial situation.
Divorce of the beneficiary:
Assets owned outright can be taken into account when financial provisions are made during a divorce settlement. Assets gifted to a beneficiary may therefore be lost or have to be shared with a former spouse.
The Mammon effect:
When an asset is received the desire to sell it and spend it can prove overwhelming to some people. This can apply even if the beneficiary appears to have no immediate intention of selling or releasing any money tied up in the gift. Motivating factors, such as mortgages, pressing debts, the desire for holidays, cars and the cost of bringing up a child, can push people into wanting to raise money and release capital by whatever means necessary. This could mean that assets which have remained in the family for generations are lost.
A trust allows you to provide for your spouse or partner whilst protecting the interests of any children. This can be particularly important for families where there are children from previous marriages and to protect yours assets in the event of your spouse or partner meeting someone else. For example, if a beneficiary dies, an asset that has been given to them outright may pass by Will or by the Rules of Intestacy (where a person dies without a Will), to their spouse who may go on to meet a new partner and remarry. On their death, this asset could then pass onto their new spouse or step-family, resulting in the asset ultimately benefitting a completely different family. This can often be a concern when large gifts are made to married children.
Gifts of income-generating assets:
If income-generating assets are important and are given away, there will be a possible impact on the standard of living of the person making the gift. If you make an outright gift it can no longer be used by you to generate an income, should you need it.
False hopes about tax:
Some people expect that gifting an asset outright will remove the asset from their estate and will therefore have the effect of reducing their estate for Inheritance Tax purposes. However, this is not always the case. There can be other tax considerations as well, such as the triggering of a Capital Gains Tax charge. Tax implications can be complex, and it is important that advice is sought before any gifts are made.
Beneficiary in receipt of means-tested benefits:
If the beneficiary is in receipt of means-tested benefits, those benefits could be reduced or stopped as a result of receiving the gift. They may also be unable to manage their affairs due to an illness or disability and so a trust is a way to provide for vulnerable loved ones who are unlikely to be able to look after their own affairs.
The pressure of responsibility:
Some beneficiaries can suffer from anxiety upon the receipt of significant sums of money or high value assets such as property. It may put pressure on the recipient and although they may appear content and competent, they may become nervous with the accountability that accompanies it.
The beneficiary who is “under the influence”:
Some beneficiaries can be easily influenced by family members or friends who may not always have their best intentions in mind. In addition, addictions such as drink, drugs or gambling can also lead to a beneficiary making unwise decisions in relation to their gift.
The loss of motivation:
It may be that the receipt of an outright gift provides the beneficiary with an opportunity to give up working as hard as they have before. They receive what they consider to be a great sum and cease to apply themselves to their education, work or life in general as they feel they have the asset to fall back on.
A trust allows the settlor to indicate how they wish the trust fund to be used and who should benefit but can leave it to the trustees to decide, when and how. The settlor can leave a letter of wishes for the trustees to express their wishes in further details or leave the decisions to the trustees discretion. This type of trust also enables people to benefit, who are not even born yet – such as future grandchildren.
To protect the inheritance of young children until they are old enough to take responsibility for their own affairs, whilst also ensuring that funds can be made available to cater to their needs during their upbringing, such as funding their education.
To help succession planning in a family business.
Trusts are personal arrangements, laying out how a family’s assets are to be distributed within the family and many people would expect such arrangement to be kept confidential. The general public has limited or no access to information on family trusts, this information is retained by the trustees and only disclosed to beneficiaries in certain circumstances.
Any asset owned by you can be placed in Trust, including your family home. You can also retain a benefit from these assets, including using a property as your home during your lifetime. Putting your property into Trust is a big decision and there are lots of things to consider. Your family home is often your biggest asset and may provide you with your personal and financial security. Putting your property into Trust will mean changing the ownership and it is important that you are comfortable with the advantages and the disadvantages before making this decision.
Just like giving an outright gift, you can have the pleasure of seeing the arrangements put in place to pass your property to your children or other beneficiaries during your lifetime. Unlike an outright gift, putting your property into trust ensures that you can continue to enjoy the same benefits and protection as an owner.
Creating a Family Trust can provide an opportunity to formally recognise the contribution, love, care or sacrifice which a family member or other person has made for you or your property without the risks involved with an outright gift.
Passing on assets through a Family Trust during your lifetime can often avoid problems and disputes relating to the distribution of assets on death. Claims against deceased estates are on the increase, taking your property out of your estate can help avoid your property being caught up in any future litigation.
Creating a Family Trust will give you peace of mind that your assets can be preserved and passed on to your chosen beneficiaries after your death. The beneficiaries and terms of your Trust can be directed and approved by you and the Trust will already be set up before you die.
Unlike other assets, any property held in a Family Trust will continue to be managed by your Trustees and not become the responsibility of your Executors or Personal Representatives on your death. This means that assets can be sold or transferred without a Grant of Representation. The Trustees can sign all the paperwork to make the transaction smooth and straightforward.
The financial obligations and other burdens often felt as a property owner can be passed on to your Trustees. It can be reassuring as you get older to know that the paperwork relating to property ownership will be dealt with by your Trustees, even if your mental capacity becomes compromised.
You can ensure that you are able to remain in your home for as long as you wish. If you are ever in the position that you wish to relocate or downsize, it is still possible for your property held in Trust to be sold and a for new property to be purchased under the same terms.
If your home needs to be sold, or if you are no longer able to live there, you can remain entitled to an income from it. This could help supplement your income if you need to live elsewhere.
Although your Trustees will be empowered to look after your property, it will not belong to them personally or form part of their Estate. You can be assured that the property will not be available to their creditors or any other claimants they may have against their Estate in the future.
This Trust is created as a discretionary trust meaning that assets are held by Trustees who will follow any wishes expressed by the Settlor in relation to the beneficiaries and distribution of the Trust Assets but that the Trustees will have the ultimate discretion on final decisions.
This means that they are treated differently for tax purposes to the assets held in the discretionary element of the Trust.
This Trust is created using a combination of a discretionary trust and a bare trust. Assets with a maximum value up to the Nil Rate Band will be placed into the discretionary trust. The remaining assets over the Nil Rate Band will be held in the bare trust for the benefit of the Settlor.
This means that they are treated differently for tax purposes to the assets held in the discretionary element of the Trust.
Putting your property into Trust is usually IHT neutral, which means IHT is neither saved nor increased. Creating a Family Trust should not be done as part of a IHT tax planning scheme.
If your home is valued below the standard Nil Rate Band (currently £325,000) then there should be no Inheritance Tax charges at the time of setting up the Trust. If your home is valued close to or over the Nil Rate Band amount, you will need to tell us and we will explain to you the best way to proceed. There may well not be any Inheritance Tax to pay after all, but care is needed.
In addition, if the Trust is created using a Discretionary Trust in conjunction with the Bare Trust then no Inheritance Tax is payable at the time of setting up the Trust.
The value of the Trust assets is taken into consideration upon death and Inheritance Tax is assessed at that time.
There is no Capital Gains Tax payable upon the transfer of your family home into a Family Trust providing that your family home is also your primary residence. This is because the “Principal Private Residence Exemption” to Capital Gains Tax applies on entry into Trust.
Income Tax can be applicable to any assets in Trust which generate an income. For example, a rental property or bank account earning interest. It will be the job of your Trustees to keep records of any income the Trust receives and ensure that the correct tax is paid. If you are the Settlor and can also benefit from the Trust it is likely that you will need to pay any income tax due. If the Trust is not generating an income, e.g. because it only consists of the property you live in then no income tax is due.
As there is no ‘consideration’ (no money is received in exchange for the transfer of property) when the property is transferred into Trust, SDLT will not be payable on the creation of the Trust. SDLT will, however, continue to apply in the usual way if the property is sold within the Trust.
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Nothing on this webpage constitutes legal advice or gives rise to a solicitor/client relationship or fiduciary relationship. Specialist legal advice should be taken in relation to specific circumstances. The contents of this booklet are for general information purposes only.