By: BILL BLEVINS
Financial Correspondent, Blevins Franks
TRUSTS HAVE been a favourite vehicle in financial planning and asset protection for centuries. Tax mitigation is often the key element in setting up an offshore trust but they also offer many other benefits which you may not be aware of. They are very useful when it comes to the control and preservation of your wealth, for today and the future.
The person who sets up a trust is known as the ‘settlor’. The people, companies or charities named to benefit from the trust are the ‘beneficiaries’. With some types of trust, the settlor can be a beneficiary.
The company managing the trust for you are the ‘trustees’ who follow the ‘trust deed’ – the agreement which lists the assets within the trust, names the beneficiaries and sets out the duties and powers of the various parties to the trust. You can also provide them with a ‘letter of wishes’.
Most types of assets can be placed within your trust, including equities and bonds, investment portfolios, bank deposits, life assurance policies, jewellery and property.
Let’s look at the various benefits a trust has to offer.
They are particularly useful when it comes to estate planning and ensuring your assets are used to help your family, according to your wishes. A straightforward example is where you want to leave your money to your spouse if you die first, but know that he/she is not comfortable with financial planning.
You can set up your affairs to look after your spouse, and on your death the trustees will carry out your wishes and your spouse will not be burdened with the financial decisions.
You can do the same to look after yourself should you become incapacitated in the future (for example, if you develop Alzheimer’s disease). Should this happen before you give power of attorney, the courts may need to get involved to allow someone else to manage your money. With a trust, this will be avoided, you can even name the nursing home you would want to be looked after in and the trust will settle costs from the trust fund.
Trusts can also prove invaluable for complex family situations, for example if you, or your spouse/partner, have children from previous relationships. You may want your assets to pass to your partner on your death, then on his/her death to your children (and not to your partner’s children, though obviously this could be arranged as well if you wish).
You may trust your partner to carry out your wishes but intentions can change or circumstances intervene. For example, a subsequent remarriage could end in divorce, with your assets passing to the subsequent spouse and his/her children. A suitable trust will address such uncertainty and ensure that your assets are only gifted to those who you intend.
Many people set up trusts when they leave money to a child. If the child is a minor they will not have legal capacity to establish contracts, but the trustees would do this instead. You would also stipulate when you want the beneficiary to receive the money.
If you are worried they would spend it inappropriately, a trust could help prevent this – for example, by deferring inheritance age until they are older or arranging it so they have to ask the trustees when they want funds, so the trustees can prevent them making mistakes with the money.
You could arrange for them to just receive an income, until such time as they need a lump sum (for university fees, house deposit etc).
A trust could also protect your assets should the beneficiary suffer a divorce or bankruptcy.
While most people will stipulate who they wish to inherit which of their assets in a Will, a trust can be much more effective, especially if you wish to avoid foreign succession laws which can prevent you bequeathing your assets as you wish.
It also makes life much simpler for your heirs because it removes the need for probate, particularly useful if you have assets in more than one country. The trustees will already have possession of your assets so they will simply continue to hold them or distribute them according your wishes. There will be no lengthy or costly probate delays.
Trusts are also confidential; a trust does not need to be registered and the settlor does not have to be openly connected with it. Considering the powers tax authorities have nowadays to examine bank accounts etc, this can help retain financial privacy.
Having listed all these benefits, the tax planning angle should not be underestimated and if you wish to arrange your financial affairs to be as tax efficient as possible, it is well worth considering a trust.
When it comes to avoiding inheritance tax, an offshore discretionary trust is often the answer for expatriates who intend to live away from the UK indefinitely. It is very flexible and you can add and remove beneficiaries as necessary. You can include anyone you like as a beneficiary, including yourself. Assets within this trust will remain outside the inheritance tax net for the trust’s lifetime, so future beneficiaries can benefit too.
There are various types of trust, so you need to ensure that the one you chose is appropriate for your current and possible future situations and to fulfil your objectives. Professional advice is therefore necessary, especially if you want to establish a non-UK domicile to avoid UK inheritance tax.
But once you have found the right trust and set it all up, you can then rest assured that the right people will inherit your assets, in the right amounts and at the right time.