InvestmentsOct 13 2020

Trusts can protect family assets through the generations

  • Describe some of situations that can be prevented with assets being held in trust
  • Identify the reasons why trusts protect assets in the event of divorce or widowhood
  • Explain how assets in trusts can be used
  • Describe some of situations that can be prevented with assets being held in trust
  • Identify the reasons why trusts protect assets in the event of divorce or widowhood
  • Explain how assets in trusts can be used
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CPD
Approx.30min
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CPD
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CPD
Approx.30min
Trusts can protect family assets through the generations
Pexels/Andrea Piacquadio

Consider the following scenario. Mr and Mrs A have a daughter who is due to marry. They wish to provide some financial support as the young couple are hoping to get on the property ladder, but they have reservations about the longevity of the marriage. Mr and Mrs A worry that should things not work out, family wealth that they have worked hard to accumulate could be lost and their daughter could lose out.

Were Mr and Mrs A to make a direct gift, they will have no recourse to the funds. Should a divorce take place, any remaining assets would be likely to be split between the divorcees according to their settlement agreement. Given that an estimated 42 per cent of marriages end in divorce, and that around half of these are expected to take place in the first ten years of marriage, these may not be unreasonable concerns.

Alternatively, Mr and Mrs A could set up a flexible, interest-in-possession Trust with their daughter as named beneficiary. The Trustees could then loan a sum of money to help with the property purchase.

If the loan were to be used as part of a deposit for a property, if required the Trustees would be able to confirm the conditions of the loan to the lender – typically an interest-free basis and remaining outstanding for the lifetime of the Beneficiary. Should the couple subsequently divorce, the loan would remain an asset of the Trust and a debt of the daughter. This could remove it from the divorce settlement discussions, and therefore incur a degree of protection for the assets so that they remain in the family line.

Protecting against sideways inheritance

As well as providing some protection in the event of divorce, using Trusts can also help prevent children from missing out through sideways inheritance. Let’s consider a married couple, Mr and Mrs B, who wish to provide for their children but do not necessarily wish to give a lump sum in one go.

They could each gift £100,000 into a flexible, interest-in-possession trust, with their children as named beneficiaries, and their preferences specified in a Letter of Wishes. Should they both survive for seven years following the date of the gift, the gifts would be outside of their estate for IHT purposes.

Suppose one of their children seeks financial support – for example for a house deposit, or to support a business they run that has been adversely affected by the Coronavirus pandemic. They could receive a loan from the Trust, which would become a debt of the Beneficiary.

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