Affinity Consulting Group

Trusts

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Advantages of a Trust

Most people prefer not to think about what will happen to their property on death. However, failure to make proper plans can create real problems and cause great expense (including tax liabilities) for next of kin, problems that they will be forced to sort out at a time when they are emotionally upset and most vulnerable.
Making a will is a sensible way for an individual to put his or her affairs in order. However, the administration of a deceased‘s estate can be costly (often around 4% of the total value of the estate), result in long delays (normally at least one year, even for a simple estate) and very often involve a large tax bill (inheritance tax or estate duty rates are often extremely onerous).

One alternative to making a will is to set up a trust during one‘s lifetime. With careful planning this can eradicate delays, costs and taxes and provide other benefits such as protecting assets from future creditors or providing anonymity. For many reasons the use of trusts as a means of holding and passing on family wealth, even for modest estates, has increased dramatically in recent years.

Unlike a company, a trust is not a legal entity. It is best described as a relationship; an arrangement whereby property is transferred from one person (the settlor) to another person (the trustee) who holds the property for the benefit of specified people or objects (the beneficiaries). A trust deed sets out the terms and conditions upon which the trustees must hold and administer the trust assets. The trust deed also sets out the rights and interests of the beneficiaries.
A trust can also be created by a will but if assets are "transferred" to trustees during lifetime they should be unaffected by the subsequent death of the settlor. Another word for "transfer" is "settle#" hence the transferor of the assets is called the settlor and the trust is often referred to as a "settlement".
Those unfamiliar with the trust concept may be concerned about transferring ownership of their property to a trustee. However, the duties of trustees have been developed over centuries through English equity and common law and are now in many cases codified in statute law. This law distinguishes between legal ownership (trust assets are held in the name of trustees) and beneficial ownership (only the beneficiaries may benefit from the assets). Further, even greater duties are imposed on professional trustees who, in reputable and well-regulated jurisdictions such as Guernsey and Gibraltar, are required to be licensed.

Uses Of a Trust

Trusts are a powerful tax-planning tool but they also have many other uses that are of equal if not greater importance. Modern private trusts may be applied in a wide range of circumstances. They can, for example, enable a successful businessman to prepare a contingency plan to enable his estate to be properly managed on behalf of his family in the event of his untimely demise. They may also serve the father who wishes to provide adequately for his daughter on marriage, but at the same time to prevent a spendthrift husband dissipating her capital. A properly drafted and managed trust can be advantageous for any or all of the following:

Asset Protection

Trusts can be one of the most effective ways to protect assets, as assets transferred to a trust no longer form part of the Settlor‘s property. This means the assets cannot normally be seized if the Settlor gets into financial difficulties, for example, as a result of bankruptcy or divorce.

The rules of many onshore jurisdictions may, in certain circumstances, order the trust assets to be transferred back to the Settlor. This could arise if a creditor is able to prove that the Settlor transferred assets into trust with the intention of avoiding a current or future liability, or if the liability arose within a statutory period after the transfer into trust.

To overcome this problem many offshore jurisdictions have enacted legislation creating the "Asset Protection Trust". This protects assets transferred into trust as long as the Settlor is solvent at the time of the transfer and does not become insolvent as a result of it. For maximum security it is important to set up a trust in an offshore jurisdiction that has enacted this type of legislation.

Tax Planning

A correctly structured and administered trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty.
Avoiding the Expense and Delays of Probate
In most common law jurisdictions an individual‘s estate must go through the probate procedure. This can cause delay, expense, publicity and upheaval. By establishing a trust, probate can be avoided. Death has no effect on the trust property, which will continue to be held and managed in confidence by the Trustee.

Confidentiality

Proving a Will is a public procedure and therefore entirely unsuitable for those wishing to keep details of their assets confidential.
The only legal alternative form of asset transfer is via a trust. This would generally save estate duty and keep the trust assets confidential.
Avoiding Forced Heirship
Forced heirship is a particular problem in continental Europe and other civil law jurisdictions, as well as in countries of Islamic tradition. A trust can be used to overcome this problem if care is taken to select a jurisdiction for the trust that has an appropriate trust law.

Estate Planning

Many people prefer to make more complex arrangements for the distribution of their assets. These might include providing a source of income for a widow or making provision for the education of children. A trust is probably the most satisfactory and flexible way to make arrangements of this kind.

Protecting the weak

A trust allows a person to provide for those who may be unable to manage their own affairs such as infant children, the aged, or persons suffering from certain illnesses.

Preserving Family Assets

Preserving family assets, or increasing them, is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst the heirs, but retained as one fund. The fund can then accumulate further with provision for payments to members of the family as necessary, while preserving some assets for later generations.

Continuing a Family Business

A person who has built up a business will often want to ensure that it continues after their death. If the company shares are transferred into a trust prior to death, the unnecessary liquidation of the family business can be prevented. In a situation where family members have little business experience, the Trustees could be instructed to retain the shares, keep the company running, and provide payment to members of the family from dividend income. The terms of the trust will ensure that the individual‘s wishes are observed.

Gaining flexibility

A discretionary trust can provide a structure that is capable of rapid change as circumstances demand.

Trusts may also provide a means of protecting wealth in circumstances of political or economic instability or where concerns rise over medium term trading risks. In establishing a modern trust, the first step is for the individual concerned to identify the requirement. This process of thought may well be based on an appreciation that wealth needs effective management to ensure that:-

  • short term returns are optimised by competent investment managers;
  • medium long term returns are optimised by ensuring that wealth is not dissipated by the claims of any particular nation state or by relatives or by unscrupulous creditors.


Guide to trusts
Residence & Domicile
Importance of a will or trust for Isle of Man investments