Using trusts to protect wealth


Trusts are extremely useful vehicles for individuals with concerns about keeping the family wealth intact and mitigating inheritance tax and capital gains tax exposure. This article provides an overview of what a trust is, the circumstances in which you might use a trust and the benefits of doing so.


The uses of trusts are wide and varied. Oddly enough, you may have one without even knowing it! If you have a pension scheme, you are likely to have a trust attached to it which will determine what happens to the pension when you die. The pension company is merely the trustee of your funds and you choose your beneficiaries.


A trust might be created because:


• Someone is too young to handle their affairs.
• Someone is not capable of handling their affairs.
• You wish to pass on assets while you are still alive (trust created by a deed).
• You wish to pass assets on under the terms of your Will (trust created on death).


The benefits of trusts fall into two areas:


1. Family wealth protection
2. Tax planning


A gift into a trust is often preferable to an outright gift. A gift into trust can avoid a capital gains tax charge while also making an effective gift for inheritance tax purposes. At the same time you can control the manner in which the recipient benefits.


For example:


• The beneficiaries may be too young to look after the gifted property themselves.
• You may wish to confer benefit on the individual beneficiaries in the light of their circumstances from time to time rather than giving each beneficiary an equal share at a given age.
• You may wish to provide benefit for an individual but at the same time protect the funds from that individual’s creditors (in the case of a bankruptcy) or spouse (in the case of death or divorce).


The following six points describe the principles of how a trust is created and managed:


1. A trust is an arrangement which enables you to give money or other assets to another person (the trustees) to look after on prescribed terms for the benefit of individuals of your choice (the beneficiaries).


2. Although you must hand over legal ownership of the trust assets to the trustees, they cannot be used to benefit the trustees – they are simply looking after the assets for the beneficiaries. If the trustee should die or wish to retire, the assets do not leave the trust. A new trustee is appointed.


3. It is usual to have two or three trustees (but not more than four).


4. You can include yourself as one of the trustees. This would allow you to influence the manner in which the trust is managed. You and your co-trustees would be able to decide how to invest the trust assets and, subject to the terms of the trust deed, you would be able to control the flow of wealth to the beneficiaries.


5. The trust deed itself describes how the beneficiaries are to benefit. The trust may give complete discretion to the trustees about how much money to pay to whom, or it may lay down fixed rules. It is up to the person setting up the trust to decide. Ideally, the trust deed should also give certain administrative powers to the trustees, for example;
• wide power of investment
• power to appoint investment advisors
• power to use nominees.


6. Trustees must act jointly and decisions must be taken unanimously.


If you think a trust might be of benefit to you and your family, or you would like to find out more then please do get in touch with Liz Procter, Moore and Smalley Trusts & Estates Manager on 01772 821 021.