The UK government has published the outcome of its technical consultation on implementation of the EU Fifth Anti-Money Laundering Directive (5AMLD) and its impact on […]
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Trusts are very common and play a key role in many aspects of everyday life. Many people, often without realising it; will come into contact with a trust in one form or another at some point during their lives. Yet trusts are widely misunderstood and often seen as overly complex and something just the wealthy need to be concerned with.
However, trusts are a fundamental aspect of estate planning and particularly useful when planning how family assets can pass from one generation to another. The use of Trust planning is essential when family structures are complicated by divorce or second marriage/relationships, especially if this involves children within a family unit and there is potential for disinheritance. This; coupled with an ageing population, rising prosperity as well as the risk of loss of family assets due to third party threats, make trusts an excellent option for long-term planning to ensure a family’s financial security through the generations.
A trust is a legal relationship whereby a person (Settlor) gives property to others (trustees) to hold assets such as property, shares, or cash (the trust fund) for the benefit of someone else or a group of people (the beneficiary or beneficiaries). The details are set out in a document (the Trust instrument), which could be within a Will or a separate Trust Deed. A Trust can take effect during the lifetime of the Settlor or upon death of the Settlor.
How a beneficiary’s inheritance is protected depends on the type of trust created and ultimately how they inherit from the Trust. There are many different types of Trust and different methods that a beneficiary can benefit from the Trust. A beneficiary can inherit outright or through a discretionary trust. A discretionary trust can offer ongoing protection of the assets for a longer period of time as opposed to vesting to the beneficiary at a specified time, age, or event regardless of their circumstances at that time.
It is important to note that if a beneficiary inherits from a Trust outright then the trust asset then becomes part of the beneficiary’s estate. This means that once the trust assets have vested in the beneficiary there could be little or no further protection of the asset from that point meaning assets could be taken into account in the event of any future divorce, bankruptcy, or insolvency of the beneficiary. If assets vest outright to the beneficiary, they may also end up in a far worse tax position.
Or if the beneficiary becomes reliant on benefits due to unemployment or illness any inheritance received could affect their entitlement or they may need to sell assets in order to consolidate debts or to help their financial situation or use the inheritance to subsidise their income.
Discretionary Trusts however have the ability for the beneficiary to keep assets within the trust for a much longer period of time, continuing the protection of assets during the beneficiary’s lifetime and indeed perhaps down to the next generation. Whether this protection applies depends on the Trust itself and we are happy to advise not only Trustees but Beneficiaries of the options available to them to ensure the maximum protection is utilised wherever possible. Beneficiaries and Trustees should always seek professional advice in relation to a beneficiary’s interest under a trust and not just automatically appoint assets to the beneficiary especially where it is not prudent to do so due to inherent risks.
The duties of a Trustee can be complex and onerous. Choosing a Trustee is a personal decision and in doing so regard should be had to any relevant knowledge and experience they could have to ensure the correct decisions are made inline with current legislation to avoid family members unwittingly finding themselves breaching their duties with disastrous consequences.
