- Tax efficient planning
This section is designed to give an overview of how trusts can be used to protect your wealth and safeguard your assets. It is important to understand the types of trusts available, responsibilities of the Trustees and how the assets will be
managed on your behalf.
A trust is a legal agreement which allows you, the Settlor, to transfer cash or assets into a trust, and appoint Trustees to manage the assets in the best interests of the beneficiaries. It is also possible to appoint a Protector, who can oversee the Trustees’ actions.
There are several trust structures available, depending on your circumstances and objectives, and for many trusts, a readymade trust deed is sufficient. Most trusts fall into two distinct categories, discretionary and absolute (bare) trusts.
An absolute trust is often referred to as a ‘simple’ trust. When setting up this type of trust, the Settlor names specific people as the beneficiaries, and specifies their share of the benefits. It is not possible to change the beneficiaries, or their share of the trust property. Therefore, this trust tends to be used for simple structures, where there is no need for flexibility. The name ‘absolute’ is used as the beneficiaries will ‘absolutely’ benefit. Once the beneficiaries become adults, they can demand their share of the benefits.
When setting up this type of trust, the Settlor provides a list of people, or class of beneficiary, who may benefit in the future, but the distribution of benefits is ultimately at the discretion of the Trustees, hence the name Discretionary Trust. These potential beneficiaries have a hope of benefiting, but no legal right to claim benefits.
The beneficiaries listed may include, for example, the Settlor’s spouse, children, grandchildren and future generations, or indeed any named person, class of person or other legal entity. Depending on the objectives for using the trust, the Settlor may be included as a beneficiary, known as a Settlor included trust. If the Settlor is not a beneficiary of the Trust, the Trust is known as a Settlor excluded trust.
A trust can help safeguard your assets. It might be in advance of old age and deteriorating health that you start to think about giving some of your wealth to your children or other family members. However, you might not feel ready to give away your wealth in its entirety, or you may not feel the time is right for your children to receive and manage large sums of money. By using a trust, you can have comfort that the Trustees will manage the assets properly, and only distribute wealth when they feel it is appropriate, perhaps under the guidance of the Protector.
When a family member passes away, for example a parent, it is common for assets to be left directly to the next generation or several generations. This allows for a large degree of certainty as to where the wealth is distributed. However, as an alternative, assets may be
placed in trust, perhaps during the Settlor’s lifetime, or often at point of death. With the accompanying Letter of Wishes and by appointing a Protector, the Settlor still leaves clear instructions on how the wealth should be distributed. The advantage of this approach can be
As well as potential advantages to the Settlor in lifetime, the trust structure allows the Protector to guide the Trustees in a way appropriate to current family circumstances, not circumstances several years earlier when a Will, or Letter of Wishes, was drafted. It is feasible the potential beneficiaries are perhaps too immature to handle significant wealth, spendthrift, suffering with an addiction or with financial problems.
Trustees have an obligation to ensure trust assets are distributed in the best interest of all beneficiaries and must seek, and act upon, guidance relevant at the time. This contrasts to a Will which is typically legally binding and must be accurately adhered to, irrespective of prevailing circumstances. Equally, by using a trust it is possible to pay beneficiaries an income rather than advancing capital at this point.
Sometimes the children of the Settlor may be wealthy in their own right, so it is possible to skip a generation without creating additional gifts that may have tax consequences.
A further advantage of a trust may be to protect wealth against a third party. For example, if a Settlor passes away at a time when a beneficiary is having marital issues, it is possible to delay benefit until a later date, rather than distributing assets at a time when a divorcing spouse may have a legal right to part of the inheritance. This may be at next generation level or subsequent generations, and is particularly useful when there are minor beneficiaries and the Settlor has no
idea who their heirs may choose as partners or future spouses.
Equally, financial problems or bankruptcy may be apparent, so a similar delay in benefitting may be appropriate. Perhaps the method of benefitting may be temporarily modified, for example, to provide an income or an interest free loan, rather than advancing capital.
Beneficiaries may also already hold substantial wealth of their own, perhaps creating a tax liability in lifetime or on their own subsequent death. Leaving the assets to them via a trust would provide such beneficiaries with controlled access, without placing the value in their own
ownership. The use of interest free loans can allow use of the funds, without them taking legal ownership and without increasing the value of their own estate.
If your home country has ‘forced heirship’ rules, the wishes outlined in your Will can be overturned, and you might not have total freedom to decide who will benefit from your estate when you die. By using a trust which is governed outside of your country of residence, typically,
there is more control over the distribution of the assets following your death. Even if forced heirship is not relevant in your home country, a trust can still provide additional security, as it restricts someone who feels they were insufficiently provided for in your Will, from making a claim against your estate.
A trust deed is a private document which is not disclosed to the public. In many countries, once probate has been obtained, the Will becomes a public document, and a member of the public can apply for a copy. The extra confidentiality provided by a trust can offer peace of mind for individuals that their assets are protected and in a confidential manner.
Once the assets have been settled into the Trust, the Settlor is no longer the legal owner of those assets and the Trustees administer the Trust in line with the trust deed and relevant law applicable to the Trust. Depending on the rules in the Settlor’s home jurisdiction, there may be minimum periods for which assets must be held in a trust before the value is removed from the estate for estate tax purposes. Additionally, in order to gain tax advantage, it may be necessary to restrict access for the Settlor, perhaps just to an income.
If assets are not held in a trust, upon death, the legal process to administer the estate and apply for probate can be complex, and time-consuming. By using a trust, the Trustees can distribute wealth to the beneficiaries more quickly, given that many aspects of the legal process can be avoided, such as applying for probate.
It is important that the right Trustees are appointed, particularly when assets are being placed into a trust alongside complex family situations. The Trustee is responsible for managing the trust assets in accordance with the trust deed, and relevant trust law. It is recommended to have
more than one Trustee, and the Settlor will decide who the Trustees initially are, and whether the Trustees are friends or family (known as Lay Trustees), or a Professional Trustee through a trust company. Administering a trust can be complex, and keeping pace with trust law can be time consuming. The Trustees may be required to prepare and submit annual tax returns which can be a challenge for someone who is unfamiliar with tax reporting.
A non-professional (lay) Trustee cannot charge the Trust for their services, and for simple trusts, a Lay Trustee might be the preferred option. However, a Lay Trustee may encounter difficulties when dealing with the legal aspects of maintaining a trust and if the Trustee acts inadvertently or otherwise, in breach of trust, the Trustees could be held personally liable.
Usually all Trustees must sign to implement any changes to the Trust or to its assets. Therefore, if the Trustees are living internationally, coordinating the trust management and administration can be problematic.
For those who do not wish to appoint a Lay Trustee, a Professional Trustee can be used. The Professional Trustee will make unbiased decisions in line with the Letter of Wishes, trust deed and trust law, but without any influence from other family members. This should avoid any predicaments where a Trustees’ decisions can be biased due to their existing relationships with family members. A Professional Trustee will handle any paperwork and tax reporting for the Trust, which can be a substantial relief for a Lay Trustee.