Trusts have, in recent years, garnered considerable widespread attention amongst the public and in more mainstream media. No longer a preserve of the Financial Times and industry publications, trusts are often viewed with scepticism and an assumption that they must be for nefarious purposes.
In this article, we attempt to cut through some of the newspaper headlines and clickbait to explore why trusts can still play an important role in estate planning.
The concept of trusts
The concept of trusts has existed in English law dating back to at least the 13th century. It's believed that trusts originated as a means for crusader knights to safeguard their property and assets while they were away fighting. With no way to personally manage their possessions during these extended military campaigns, they entrusted others to oversee and protect their belongings until their return - forming one of the earliest examples of a trust-like arrangement.
What is a trust in today's world?
Although a trust is commonly referred to as an ‘entity’, this isn’t quite correct. It is, in essence, a relationship between the parties who bring the trust into existence (see below). Most trusts are created with a specific document (called a deed), but can also come into existence in someone’s will after they pass away; be imposed by a court; or ‘accidentally’ be created by the actions of two or more people who may not realise they are creating a trust arrangement!
Today, trusts are a secure way to protect your valuable assets and pass them on per your exact wishes. A trust, in essence, is a vault, holding your cash, property, investments and business interests for the benefit of your chosen beneficiaries. They can be very complex, designed to last many generations; or they can be very simple - for example, did you know that a parent opening a bank account for their child is also a type of trust?
What are the roles in a trust arrangement?
There are three main roles in any trust arrangement:
- Settlor - The person funding and creating the trust who determines what goes into the trust initially and the specific terms for how it should be managed and disbursed. There can be more than one settlor, and it can be an individual, a company, or even another trust.
- Trustees - The impartial parties you entrust as the person (whether individuals or a corporate trustee) who take legal ownership of the assets and are responsible managing the trust assets in line with the provisions in the trust deed. They have a legal, fiduciary obligation to act in the best interest of the beneficiaries and, although they can be guided by a letter of wishes from the settlor, this is not legally binding if the trustees consider it would be an inappropriate use of trust assets (for example, if a beneficiary suffers from addiction, poor financial management or is unable to manage their own affairs).
- Beneficiaries - The person(s) you want to eventually receive the benefit of the trust assets - this could take the form of receiving income; outright distribution of capital; loans from the trust; or use of a trust asset (such as a property). Sometimes beneficiaries have a right to certain income or assets (known as a ‘life interest’), but often they can only benefit at the discretion of the trustees. Beneficiaries can be family members, other individuals, companies, charities or other trusts: it is very flexible. It is also possible to exclude some people from being able to benefit from the trust (we commonly see this to exclude spouses marrying into a family to protect a multigenerational family business).
What are the five main benefits of a trust?
From a UK perspective, the tax advantages of trusts have gradually been eroded over time. However, trusts have a number of important benefits that may still make them valuable estate and asset protection tools:
- Maintaining control - The trust terms dictate how assets are managed, and it is usually possible for the settlors to also act as trustees - allowing them to retain an element of control over who is able to benefit, when, and to what degree.
- Asset protection - Trust assets may offer enhanced protection for beneficiaries in the event of future creditors, divorces, or bankruptcies. This is not fool proof, but choice of jurisdiction for the trust and the specific provisions can all assist.
- Tax advantages - there can remain certain tax benefits of UK trusts, particularly regarding Inheritance Tax. Non-UK trusts may have additional benefits, particularly for those who are non-UK resident (and often, but not always, non-UK domiciled).
- Avoiding probate - Assets in a trust don't have to go through the lengthy probate process that Wills do as all of the terms of the trust assets have been outlined extensively within the trust declaration.
- Continuity - a trust continues status quo even on the death of a beneficiary, settlor or trustee. Certain actions may be required to replace a trustee, for example, but the trust itself continues to hold the assets without interruption.
Estate planning and trusts at Sanctoras
The exact tax treatment, scope for asset protection and preservation of long-term, multigenerational family assets will depend heavily on the type of trust used, what assets are contained within it, who the beneficiaries are, and other factors.
If you have a sizable estate you'd like to preserve and pass on to your beneficiaries according to your specific wishes, creating a trust may be an invaluable tool to consider as part of your estate and tax planning. To discuss estate planning and trusts with a specialist, please don’t hesitate to get in touch with Aimée Dolbear ad@sanctoras.com or your usual Sanctoras contact.
