The benefits of setting up a trust

Tax is, however, a major consideration whenever an individual (the settlor) establishes a trust, not least because there are a number of pitfalls to avoid.  For example, the vast majority of trusts created during the settlor’s lifetime will suffer inheritance tax (IHT) at 20 per cent to the extent that the assets being transferred into the trust exceed £325,000.  Often, the perceived tax “benefits” of a trust are simply mechanisms to avoid the settlor or beneficiaries ending up in a worse position in comparison to direct personal ownership.

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 beneficiary’s own assets are vulnerable in the event of, for example, bankruptcy or divorce.

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.

Flexibility

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?

Will trusts