The business of preserving family wealth and passing it on through the generations can be complex, depending on family circumstances. However, trusts can provide reassurance that assets will be protected, used as intended and kept in the family.
As Paula Shea, a partner in law firm Blake Morgan, in Hampshire explains: “Using a trust structure can keep wealth secure − for instance providing protection from events affecting beneficiaries (the person who benefits from the trust), such as divorce.
"This is not guaranteed, however and matrimonial courts are now looking at this more closely than previously.”
It can help protect assets from other potential fragmentations too, as Julie Kleis, director, fiduciary specialist, RBC Wealth Management observes: “Holding a family business within a trust structure allows it to pass down through the generations, which can avoid some of the conflict between family members, that can arise.
“We also find that a lot of clients use trusts to hold assets for children, to ensure they cannot access the money until they are of a sufficiently mature age.”
There are many different kinds of trust to choose from; according to HMRC, these include bare trusts, interest in possession trusts, accumulation trusts, mixed trusts, settlor-interested trusts, discretionary trusts and non-resident trusts - and different types of trust income attract different income-tax rates.
For instance, if using a discretionary trust, which is often chosen for providing financial support to grandchildren, the trustees (the people who manage the trust) pay tax on income received by the trust. The first £1,000 is taxed at the standard rate (7.5 per cent for dividend income and 20 per cent for other income).
Trust income over £1000 is taxed at 38.1 per cent for dividend income and 45 per cent for other income.
Perhaps one of the most useful aspects of a trust, for keeping money in the family, is the ability to direct how money gifted to a child is used, as Mrs Shea explains: “A child in their 20s could still be susceptible to manipulation, so it’s advisable not to put large sums of money in their hands.”
She adds: “Typically funds gifted to a child are held in a full discretionary trust, and knowing that the money is being kept in this environment can give comfort that it will be used appropriately.
"For instance, the settlor of a trust (the person who puts the assets in) can state the circumstances under which the money in the trust should be released. If it is to help pay for a car, for instance, the settlor can even stipulate what kind of car that should be.”
Discretionary trusts can also be a useful vehicle for funding school fees, for instance where the older generation might wish to assist a grand-child financially, as Mrs Shea explains: “Grandparents may be able to help as they often have more wealth at their disposal – for example they might have sizeable pensions. They can make gifts to a trust, for instance a bespoke trust for an individual child or for a group of grandchildren.”