TRUSTS – Keep Your Money Like An Aristocrat
An Introduction to Trusts
There are a lot of names for different Trusts, some reflecting the purpose of the Trust in a way that makes sense to a lay person and some will sound like jargon or legalese to you most likely. We’ll cover what you need to know below. But for sake of completeness, along with specific kinds of Trust that we will mention in detail, these are the most commonly used terms:
- Family Trust – in more detail below, but set up obviously with your family in mind
- Income in Possession Trusts – again in much more detail below and usually set up to give a beneficiary an income
- Discretionary Trusts – the name gives a clue and Trustees have discretion to vary certain aspects of the Trusts as required
- Bare Trusts – assets and Trust property are protected by the Trustee until the beneficiary comes into their majority. This is any time they are over 18 in England and Wales
- Settlor Interested Trusts – this is where you or your spouse (as the “Settlors”) are the actual beneficiaries of the Trust
- Non Residence Trusts – this is where we set up Trusts abroad for tax planning purposes
So let’s get into the detail of what most of our clients want to know about Trusts in the most common scenarios …
What’s a “Trust”? The Devil and the Genius are in the Details …
You’ve heard the phrase “The rich just get richer” haven’t you?
Well, when you see how the rich, the aristocracy (including the Royal Family) manage to maintain and increase their wealth and pass it down through generations intact, they’re using Trusts.
So then, what is a Trust?
A Trust is a “legal instrument” that’s been used by the rich for hundreds of years. Traditionally it has been the preserve of the landed gentry or the very rich, partly because of the expense involved in using lawyers to set them up.
A Trust is a formal transfer of capital. It could entail property or money (cash in a bank account for example) or shares in a company to a certain group of people or a company.
That group or company will be set up with instructions that mandate that they are custodians of those assets for the benefit of specified other people.
If you want the Trust to be operative during your lifetime, for example, because you want it to take immediate effect, then it will usually be set up by something called a Trust Deed.
In estate planning, our clients often want to set up lifetime arrangements with a Trust like this.
However, obviously an estate plan is part of what a lay person might call a Complex Will. When we’re talking about a Trust that you want to be created on your death (or shortly after) then these Trust provisions must be set out in your actual Will. This is what we call a “Will Trust”.
Whether you want to make a Lifetime Trust or a Will Trust, the Trust document will state the people who you want to be responsible for taking care of the assets that you will put in that Trust.
These people are called the Trustees. The people who you want to benefit from the assets in the Trust are called Beneficiaries.
The Trust that you create will also contain all the rules and any conditions under which the Trustees must act, and to which the Beneficiaries must adhere.
When you set up any Trust, it will clearly detail what the initial assets (“Trust Property”) will be. You may be more familiar with the term “Trust Fund” – they’re interchangeable. The basic legal genius of all Trusts (what you might call the unique characteristic of “Trust concept”) is to separate the legal ownership of assets from the beneficial ownership.
So this means that the Trustees are the actual legal owners, but the beneficial owners are your beneficiaries.
The Trustees act with solemn duty towards the beneficiaries. Legally they have a fundamental duty of loyalty, honesty and most importantly perhaps, they have a duty to act as if the beneficiary’s interest is paramount. This is the case even if the beneficiary’s interest outweighs their own.
A Trust will last for an appropriate amount of time. The Trust document will stipulate clearly the period of time during which the Trust will exist. So, for example, in the case where money might be put aside until a child marries, the Trust might last for a few years. Other Trusts like the ones we talk about above for the great estates usually are set up to last for much longer. In fact, a Trust may last for up to 125 years, or even in perpetuity if it’s for a charity. As it is the case that circumstances and events envisaged might be fluid, the Trustees are usually entitled to have the power to “settle” the Trust – in other words to terminate it – at their discretion.
When they create Lifetime Trust Settlements, many of our clients like to take advantage of the fact they can appoint themselves and/or their spouse or partner as Trustees. They like to do this because this means that they retain discretion and some control over the assets along with the decision-making powers – even though legally they are obliged to exercise these powers for the benefit of the Trust beneficiaries.
For example …
As a parent or grandparent, people are very often concerned that their children or grandchildren might squander the money if they’re too young to handle it responsibly. “Too much too soon!”
The best advice is to create a Trust that will contain the assets or the money and keep it intact, safe and probably profitably invested until the grandchildren or children have attained a certain age and/or level of wisdom.
Wealth Through The Centuries
So, for many centuries Trusts have been the means by which people with enough knowledge or enough money have protected their assets and made sure that they would be used the way they envisaged after they gave the assets away.
Why is that important? Well, if you consider a basic Will … When you make a gift to someone – a child or grandchild, say – then that is what’s called an “outright gift”. That means the recipient can deal with the gift, money, property, shares exactly as they wish, whether that’s wise or not. In other words, they immediately assume all rights over that property, even if they’re not equipped to deal with it prudently. The same applies to gifts you might make during your lifetime.
The genius of Trusts and why Trusts are so important to help you protect your wealth and assets in the long term, is this: in a nutshell, it enables you (the person making the gift, or “Settlor”) to make sure it’s dealt with in a manner you think appropriate.
In other words, you can give away your property, but with strings attached.
That’s what the aristocracy have been doing for nearly a thousand years – Trusts have preserved and helped to manage the wealth of the great estates for the benefit of their heirs through the centuries.
THE THREE MAIN BENEFITS OF CREATING TRUSTS
So, let’s summarise the main reasons why Trusts work so very well …
- Control of Your Assets
When you decide to set up a Trust you will define the assets that you want to put into it. The Trust document will define exactly what those assets are, and exactly how they’re to be dealt with.
Legally, you will be called the “Settlor”. Under your Trust, you’ll be able to dictate who is going to benefit from these assets, under what terms, and to what extent.
For example, let’s say we’re discussing a house that you own. You will be able to decide whether that property can be sold, explicitly what the beneficiaries may use it for, and who each beneficiary will be in the future. The Trustees will be the people who manage that Trust asset on a day-to-day basis. In this scenario if we’re making a Lifetime Trust you, the Settlor, can be one of those Trustees (obviously while you’re still alive).
So, instead of losing control completely, as you would should you simply give the property away, you can remain in control. As a Settlor, you can mandate the terms under which the property is managed remotely in the Trust document and also directly as one of the Trustees. Considering you no longer legally own the property, this is a remarkable way to retain what is in effect complete control of it (all provided that any decisions made are made “in the best interests of the beneficiaries” and obviously the terms that you yourself create when you set the Trust up).
- Protection of Your Assets
Let’s say that you want to gift some of your wealth to benefit family members. Let’s say we’re talking about money (cash or shares). You might be very concerned that some or all of your intended beneficiaries may sell the shares or “blow” the money. Maybe they like parties, fast cars, or you’re concerned they might lavish attention on an unsuitable partner or make a “bad” marriage …
The Trust that you would create in those circumstances would simply restrict either the amount or the type of benefit that you’re going to convey.
So for example, you may have a niece who is about to embark on her studies at university. Let’s say you want to help her to meet her legitimate expenses and assist with her studies, but you don’t want to find that, instead of books and lodgings, your hard earned money has disappeared in a flash on parties and fast living.
An appropriately worded Trust will completely protect your money and your aims and achieve the end that you desire.
- Flexibility to Adapt to Changing Circumstances
As well as control and protection, the magic of a Trust is that it can allow your Trustees to adapt to changing situations, when and if they occur.
So, when you make an outright gift of something it’s too late if you then change your mind and you wish you had given it to somebody else, but with a Trust there’s flexibility …
For example, let’s say you’ve got two children who’ve left home, we’ll call them Andrea and David. Andrea has a highly paid job, but David is still studying.
You might want to create a Trust drafted to be flexible to allocate the income – let’s say from shares or a rented property – to be used (by the Trustees) to help David while he’s on a low income.
But let’s say later on Andrea takes a sabbatical from her highly paid career to start and raise a family, but David has finished university and earning a good salary himself, then it might be that the Trust income could help Andrea meet any income shortfall instead.
The Popular Solution – Family Trusts
One of the most popular Trusts is a Family Trust. A lot of clients ask us for a “Family Trust” and it can be a catch-all name in certain ways for some or even all of the specific kinds of Trusts that we might cover below.
Setting up a Trust for your family is obviously a great way to protect your assets – especially the family home, or to protect your wealth with a specific focus on particular members of your family.
Among the many reasons clients might ask us to set up a family trust for them are:
- Protecting the family home against attacks from creditors for the self-employed
- Putting money aside safely for the benefit of children or grandchildren, for example for university fees or for first home deposits
- Ring-fencing assets, especially the family home from attack in the event that you or your partner require residential home care in the future
- To minimise taxes – especially Inheritance Tax
- To ring-fence assets of all kinds – cash, shares, property etc – when you or a family member are entering into a marriage, or sometimes more importantly, a remarriage
HOW TO SET UP A TRUST
Broadly speaking, when setting up a Trust there are two main “categories” you might use to define the process. Which one you use will depend on how you want to organise income or benefits from your asset.
So, for example, you may want to settle the use of a house or flat or the benefit from cash, rent, dividends or interest to be organised under:
An Interest in Possession Trust, where each beneficiary has a fixed entitlement to whatever assets are settled; or
A Discretionary Trust, where income and/or benefit from assets under the Trust will be allocated according to the discretion of your Trustees. For example, your Trustees might decide that since all of your children are doing really well, then – at least for a certain period – none of the income is distributed but is instead accumulated for future use to be applied to your grandchildren instead.
We can now consider these types of Trusts in further detail, each in turn:
Interest in Possession Trusts
There are certain circumstances where an Interest in Possession Trust is an excellent solution. If the terms isn’t familiar to you, you may have heard of a Fixed Interest Trust or a Life Interest Trust instead.
Pragmatic people often set up Trusts like this in their Will. They might do so in order that after they die, their surviving spouse can benefit from assets or wealth which can then be passed on as fully as possible to your children or grandchildren for their benefit.
In a Will this might be expressed like this: “ … income to my Wife during her lifetime, and after her death, remaining income and capital to my children”.
Using this kind of Trust is extremely popular with our clients when they marry for a second time.
Let’s say you and your new spouse each have children from your first marriage. When you die, this Trust makes sure that your new spouse is provided for, but it prevents the children of your first marriage from being excluded because your new spouse passes this wealth to her own children instead. In the trade, we call this “sideways disinheritance”, and it’s a scenario which horrifies people if they haven’t thought of it before. When they know how this can be avoided, this sort of Trust is obviously a no-brainer.
Let’s be “reverse sexist” for a change and look at another scenario …
So let’s say you want to leave your assets to your husband, but you’d like to leave part of it as an absolute legacy gift and put the remainder into a Trust to last during his lifetime. You could let your Trustees have discretionary powers to advance cash in case he needs assistance (such as a power to make cash advances or interest-free loans).
Perhaps you have a family-owned company and you’d like to give shares to your children or your grandchildren, although you worry if you give them an outright gift, they could sell them outside of the family unit. To alleviate this concern, the shares could be put into Trust under a term such as “to my children equally for their respective lives and thereafter to my grandchildren should they survive them”. By doing this, both your children and your grandchildren would derive benefit from income from the shareholding but never gain control of the shares so that they never have voting rights, nor the ability to dispose of them because that power only resides with the Trustees.
As their name implies, discretionary Trusts give your Trustees flexibility and enable them to use judgment and common sense to make decisions about which of your beneficiaries are most in need of resources at any given time.
So, for example, if you were a grandparent you might have set aside assets for your grandchildren and wish your Trustees to have discretion to include grandchildren who may be born later after the Trust is established or even after your death.
Another example is that you might want to provide for your children but recognise that different children have different needs. Perhaps one of them is already wealthy and comfortable. Setting up a discretionary Trust in favour of all your children and grandchildren can allow your Trustees to make accommodations for the changing circumstances, incomes and situations relating to both children and grandchildren, and even for example give the flexibility just to benefit the grandchildren should all the children be comfortably wealthy if the Trustees judge that to be in everybody’s best interests.
As with a lot of estate planning generally, it’s better to put these measures in place sooner rather than later and our expert advisers can explore the best way forward to achieve your aims.