Trusts will keep the assets 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.

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 Julie Kleis

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.

Keeping control

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.”

Ms Kleis also believes that discretionary trusts are a good choice for preserving family wealth: “Discretionary trusts are extremely flexible – they can be used for whatever the settlor wants to achieve. They are useful in all situations where a trust is required.

“A fully discretionary trust document is the best option, as it provides not just flexibility, but allows you to be specific about what can be done with the assets and when. It would always be our first choice, but any decisions should be guided by legal and tax advice.”

Protecting assets

There are other ways in which trusts can be useful, for instance if parents or grandparents may not have a substantial sum to gift, as Paul Allan, financial adviser at Wren Sterling in Glasgow points out:  “A trust could be useful for preserving family wealth in instances where you might not have much cash available, but want to put money away. For example, you could put a life assurance policy such as a whole of life plan into trust, although this would obviously only pay out on death, rather than at a specific time.”

And for those parents who do have a pot of money available, Mr. Allan adds: “You could also put a lump sum into trust for your children’s benefit at a future stage, using an investment bond, which is the most commonly used vehicle for this purpose, as it is classed as a non-income producing asset.”

This has other benefits, as Mr. Allan explains: “This can be very useful for parents who don’t want to risk their own financial security. If they know their children might need help in the future, they can just set aside a lump sum in trust and invest for growth. I believe this is a very good use of a trust.”

This can also be advantageous from a tax perspective, as Mr. Allan indicates: “If the child is not a taxpayer at the point when it pays out, it could be a very tax-effective decision.”

However, tax can be a sensitive subject for trusts, which have had some unfair criticism, according to Ms. Kleis: “There is a populist view that trusts are set up to protect people from tax, but what they are really for is protecting assets – for example, from ‘spendthrift’ beneficiaries, and to avoid fragmentation of family businesses and assets.”

Fiona Nicolson is a freelance journalist