Control and asset protection
Protecting assets and ensuring that control rests with appropriate people are usually the main drivers behind creating a trust. Often a parent or grandparent wants to transfer assets down a generation or two but does not feel that the young recipient is ready to handle what could be a substantial amount. There may be a fear that they would fritter the money away, that the wealth would act as a disincentive to work hard and make a living themselves, or that the responsibility of managing the assets would be overwhelming.
A trust is an excellent way of maintaining control with responsible people (the trustees), while making the assets available to benefit the chosen beneficiaries. The beneficiaries may be unsuited to managing the assets, particularly if they are complex (for example, a business) and/or substantial. Trustees with appropriate expertise can instead be chosen.
Assets within a trust are also far better protected than they would be if held directly by a beneficiary. A beneficiary’s own assets are vulnerable in the event of, for example, bankruptcy or divorce. While assets held in a trust are not completely impervious to attack if a beneficiary falls into these troubles, they are far better protected in comparison to personal ownership.
You may be ready and able to pass assets on, but unsure of exactly how much each beneficiary should receive and when. What may seem like a sensible division of assets now may seem wildly inappropriate in 10 or 20 years, when circumstances may have changed significantly. If assets are held in trust, the trustees usually have wide powers to be able to react to changing circumstances; changing the nature of the trust if necessary, and making distributions to beneficiaries only when appropriate.
Given the broad discretion trustees have, it is clearly important that the right people are chosen to take on the role, and that the settlor leaves them detailed guidelines in a letter of wishes.
So, what are some typical situations where trusts can be a good way forward?
Many wills involve a trust of one kind or another. If you want to provide for a surviving spouse but make sure that the assets ultimately pass to your children, you can leave a life interest trust for your spouse (which also benefits from the inheritance tax spouse exemption) with your children being the ultimate beneficiaries. This is particularly useful when there are children from a previous relationship, when there is a likelihood of the surviving spouse remarrying and/or there is a significant discrepancy in wealth between the spouses.