There are four basic reasons why the use of a trust can be an important part of asset planning for an individual.
The role of the trustee is critical to the whole process and in an individual’s lifetime they may choose to give assets to a trust but can retain effective control of them by acting as a trustee. This could be important where the assets are shares in the family company and those shares carry voting rights which could control the company.
| Example Dad currently owns 90% of the shares in the family company. He wants to transfer some of the shares but, because he is not sure about the ability of his children to take decisions regarding the company, he is reluctant to give them the shares directly. He could opt to put the shares into a trust and to act as a trustee himself. He would then exercise the voting rights connected to those shares. He must, however, remember that he must now exercise those rights for the benefit of the children and not for any personal benefit. |
This is the most common reason for using trusts. There may be concern that the children may fritter away the value of the assets or they may enter into a marriage which breaks up and the divorce courts decide to pass assets to the spouses. Parents may therefore be reluctant to give assets directly to their offspring and a trust can provide a useful alternative. The trust can provide for the income from the assets to be paid out to the children but the capital can stay locked in the trust, although the trustees could have the power to advance capital if that was needed.
Although they look cumbersome legal documents, trusts can be very flexible ways of holding family assets. A discretionary trust allows income to be spread around the family without changing the direct ownership of the assets which stay in the trust. The power to advance capital gives flexibility and many trusts also have the power to appoint capital to new trusts so that changes in the family situation down the years can be taken into account.
Many people are happy to accept the idea that giving away assets will help ease the overall IHT burden for their family but they are uncertain as to whom to give the assets. This may be a particular problem when children are young or unsettled in their life. The parent cannot see a clear line of action and so does nothing. A trust provides a way of securing the tax advantage of getting assets out of an estate without having to take a final decision on the destination of those assets. That decision can be taken by the trustees over the following 80 years.
| Example Dad has his 90% shareholding in the company and wants to reduce his holding. His eldest son has just completed university and is starting work in the family company. His middle daughter is still at university and the youngest child is still at school. If he puts the assets into trust he will achieve the transfer of value for tax purposes but can leave it to the trustees to decide if and when each child should receive any shares in their own right. |