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Family Trusts: Outdated and Best Left in the Past or the Secret of Keeping Family Wealth

Family Trusts: Outdated and Best Left in the Past or the Secret of Keeping Family Wealth

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5 minute read

Trusts are a time-old concept frequently mentioned in Charles Dickens and Jane Eyre novels. UK trusts in fact go much further back in time than the novels themselves, even dating back to the 12th century and the period of the Crusades.

Nowadays we have the generations of ‘trust-fund’ children, the so-called ‘trustafarians’. This alludes to the misconception that trusts are solely for the ultra-wealthy. It seems in more recent years however, trusts have become a dying breed. Are we missing a trick here?

In this blog we look at the benefits and flaws of trusts in retaining your wealth and keeping it afloat across multiple generations.

In the next decade, trillions of pounds will be transferred from one generation to the next.

Regardless of whether the wealth was accumulated through hard work or whether it was inherited, a key concern for many is simply losing it and future generations not benefiting from it.

Furthermore, for many, it is imperative that as much of their wealth is bequeathed to their heirs rather than being ravaged by the 40% inheritance tax rates.

This fear of wealth diminishing isn’t unsubstantiated, with 70% of families losing their wealth by the second generation. Moreover, 90% of families lose their wealth by their third generation; this can occur due to business closure, ill-prepared beneficiaries, bad investments, or just natural dilution.

Consequently, there are justified concerns about the wealth that is being passed down through a family being used in a sensible and appropriate manner. It might be as simple as wanting to leave an inheritance to young family members and ensuring their portion is safe until they reach a responsible age when they can effectively self-manage their finances. It may be that you want the money you pass on to be used in a specific way; for example, to send a child or grandchild to university, to purchase them a home, or to help to get their foot on the property ladder.

It could certainly be that you just don’t want the money that you have for so long safeguarded to now just be frittered away. Additionally, many fear their money will end up in the hands of people other than their intended heirs.

A trust is an excellent way of maintaining control by using responsible people (the trustees) while making the assets available to benefit the chosen beneficiaries. The beneficiaries may be unsuited to managing assets, particularly if these are complex (for example, a business) or if the assets are substantial.

Trustees with appropriate expertise can be chosen to manage the trust on your behalf.

Assets within a trust are also better safeguarded than they would be if held directly by a beneficiary. A beneficiary’s own assets, for instance are vulnerable in the event of bankruptcy or divorce.

In some instances, beneficiaries may be deemed vulnerable by the family and therefore may not have the physical or mental attributes to manage their own affairs. A trust could be the optimum choice here, as the trustees can provide financial support with capital lump-sums or alternatively provide the beneficiary with a regular income.

While assets held in a trust are not completely immune from attack if a beneficiary falls into these troubles, they are far better protected in comparison to personal ownership.

Trusts can be used to pass on wealth while the ‘settlor’ (the person who creates and puts assets into the trust) is still alive, as well as after death. Trusts can have all sorts of conditions attached to them. The person appointed to manage the trust (the trustee) has an obligation to ensure the conditions are complied with.

So, should setting up a trust be your default option for leaving your wealth to your family? It’s not quite as straightforward as that, there are some drawbacks to using trusts as well as the plethora of advantages. Let’s explore these:

Benefits of Trusts

  • You can ensure the money is spent wisely

We’ve already touched on some of the key benefits which explain why people choose to manage their estate using trusts rather than simply writing a will. Trusts allow you to apply special conditions to inheritances, for example leaving a lump sum to a young family member but specifying that they should not get access to the fund until they reach a specific age.

  • You decide who inherits the assets if the beneficiary was to die

Trusts are also used to avoid some of the complexities of inheritance law, specifically those that relate to marriage. For example, if you and your partner both have children from other relationships prior to marriage, when you die, whatever your spouse inherits from you is theirs to do with as they please. Notably, this could mean they leave an inheritance to their children but not to yours. A trust is an effective solution here, as you can specify exactly who you want to inherit your assets.

  • You set the trust to provide a regular income rather than have full access

Trusts can also be created to facilitate a beneficiary to receive just an income without physically having access to assets. Additionally, an ‘interest in possession’ trust give the beneficiary an income from interest or from investment returns.

  • Reduction in Inheritance Tax

The most renowned reason for putting your estate into a trust is to reduce inheritance tax liabilities. Once assets are placed into a trust, legally, they no longer belong to you. Therefore, when the contents of the trust are available to the named beneficiary, it is not automatically treated as an inheritance for tax purposes. You have to, however, survive for seven years once you have placed money into a trust, in order for it to be exempt from the tax implications.

Flaws Affiliated With Trusts

  • Requires a specialist to set them up

The main drawbacks of using trusts for inheritance purposes are that they can be considered a complex area of financial management, and thus difficult for the average person to navigate. Without due care and attention, you might not get all of the tax benefits you were anticipating.

An example being that the 2006 Finance Act changed the rules so that specific types of trust, including interest in possession trusts, are no longer fully exempt from Inheritance Tax. Anything you pay into these types of trust however, over the personal Inheritance Tax allowance (£325,000) is now subject to a reduced tax rate of 20%. It is still less than the full 40% Inheritance Tax rate, but does not negate the liability entirely.

  • Assets in the trust are no longer considered yours

Another crucial element to consider if contemplating using trusts, is that essentially you lose control over your own wealth the moment you sign the funds/assets over. Any assets placed into a trust are no longer considered to belong to the settlor; they instead belong to the trust and must be used in accordance with trust rules. Even in situations where settlors make themselves the trustee, in order to oversee management of the trust while they are still alive, they cannot use the assets it contains as their own and cannot change their mind at a later date.

The Types of Trusts

There are a variety of trusts that can be used;

  • Discretionary Trust
  • Interest in Possession Trust (life interest trust)
  • Bare Trust
  • Life Insurance Trust
  • Will Trust
  • Disabled Person’s Trust

For this reason alone, due care should be taken before considering which type of trust is most appropriate to meet your needs.

Whichever way you look at it, choosing to put assets into a trust is a huge decision; you should approach it with a clear understanding of the potential implications. Due to the complexity of trusts, it is strongly advised you seek professional advice to comprehensively discuss and assess your options. If setting up a trust is something you are considering, get in touch with Capital today. One of our specialist advisors will be more than happy to talk you through the process and explain it in greater detail.

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