Contributed by JOHN WESTWOOD
Managing Director, Blacktower Financial Management Limited
FOLLOWING THE recent attacks on trust structures in the UK, John Westwood provides an introductory overview and summary of their remaining benefits and possible downsides.
Trusts have been around for a long time, their origins date back to the Norman Conquest. Historically, they have been used for a host of reasons, including passing assets to future generations or protecting spendthrift beneficiaries from their own excesses. Tax savings have been a motivator, but there are many other advantages to consider.
Many people are unhappy with the concept that, on their death, their property will immediately be passed to family members either by choice, or by law. It may be preferable to have a continuing source of income, make provision for a child’s education or to set up a sinking fund to protect against medical or other unexpected events. A person may wish to put specific arrangements in place in the event they become incapacitated and a trust is a flexible and easy way of achieving this.
Usually, a death is a catalyst for significant disruption, even if there is a will in place. Those domiciled in common law jurisdictions – the UK, US, Australia, Canada, New Zealand and so on – are covered by relatively familiar rules. However, if a person dies in a non-common law jurisdiction – most of continental Europe – there are often questions of forced heirship to consider.
Tax saving has been an important characteristic of trusts, used early on in their history to avoid a form of estate duty known as feudal incidents. In an attempt to increase the tax intake, UK Chancellor, Gordon Brown, has recently changed the rules for certain types of trusts that had enjoyed a relatively benign tax regime. That said, the opportunity still remains for certain individuals to make significant tax savings.
Protecting the weak
One benefit of a trust is to provide a financial shelter for those who may be unable to manage their own affairs. These might include infant children, aged parents, widowers or persons of unsound mind. An appropriately drafted trust can provide a safe haven, which would be beyond the reach of creditors. However, the motivation behind creating a trust must not be to defraud creditors, and such a transfer would usually invalidate the trust.
Given the climate of global instability, transferring assets to a trust can be beneficial, as it provides a degree of security from expropriation, and reduces vulnerability to forms of coercion or arrest. The decision to transfer assets into a trust can simply be to avoid having all one’s eggs in one basket.
Perhaps one of the most useful aspects of a modern trust is its ability to adapt to changing circumstances. A settlor (the person setting up the trust) can give the trustees wide discretionary powers, and can indicate how these could be exercised. Selecting a safe jurisdiction is an important decision, which should be considered at an early stage. The jurisdiction should have a legal and political system that recognises and permits the creation of trusts.
This is perhaps an intangible benefit, but one that has particular relevance for high profile individuals. For example, following the death of Princess Diana, when probate had been obtained, her will became a public document for all to see. A private trust is not registered and, therefore, is not in the public domain.
While some trust deeds may contain a paragraph stipulating that certain individuals have the power to revoke the trust, it is not usually the settlor, as this may undermine one or more of the advantages of the trust being established in the first place. One solution may be to vest certain restricted powers in a trust protector (a person designated by the settlor to protect the best interests of the beneficiaries). That power could be further qualified so that the trust protector has the power of veto only under clearly defined circumstances.
Loss of control
A person setting up a trust might be totally convinced of the benefits, but, at the same time, reluctant to hand over control of the assets because of the hands-off nature of the transaction – the settlor sees the advantages, but still wants to call the shots. With a skilled draughtsman and experienced trustee, there is no reason why the settlor cannot continue to have some say in how things are managed. Care must be taken to ensure that significant powers are not reserved, in order to avoid a situation where the trustee could be seen to be acting as an agent/nominee.
In some circumstances, the trustee could face a conflict between the settlor’s wishes and the extent to which the trustee feels comfortable that they can comply with those wishes. The conflict could arise as a consequence of a trustee’s obligation to exercise their powers, which is a fundamental principle of trust law.
One of the main problems in creating a tax effective structure is the inability to gaze into a crystal ball. Early in the planning stage, the settlor and their adviser should consider the overall position, and that of the trust and its beneficiaries. However, as was recently evidenced by the UK Chancellor’s budget, it is impossible to predict the future, even if the original tax advice was sound.
The final perceived drawback is perhaps more relevant to those from non-common law jurisdictions, who may be wary of an alien culture and an unfamiliar legal system.
The benefits of creating a trust are such that it would be a shame if it were to prevent someone from taking advantage of the concept. The settlor and their adviser must take time at the outset to understand what is involved, so that the trust meets their objectives and addresses their concerns.
The modern trust is a flexible vehicle for the management and disposition of assets. Its advantages are available to individuals from all parts of the world, not just from those from common law jurisdictions where they are generally more familiar.
• John Westwood can be contacted by telephone on
289 417 267 or via e-mail at [email protected]