6 Reasons For Using A Trust

The trust concept has proved to be enormously adaptable and is now widely used in financial planning for both personal and commercial situations. Various types of trust have been developed over time and the most appropriate structure for clients will very much depend on their particular circumstances and objectives.

Such is the flexibility of a trust that it would be difficult to define its potential uses comprehensively. However, the purpose of this article is to explain just a few of the more common reasons for establishing a trust together with the potential benefits that may be available not just offshore but also within the United Kingdom.

1) To Preserve Family Wealth

‍A trust is regarded as one of the most efficient structures to help ensure the preservation and transfer of family wealth from one generation to the next. Typically, the use of a Discretionary Trust provides maximum flexibility in meeting the future needs of beneficiaries as they do not have any direct legal rights over any part of the trust fund but only a right to be considered to benefit when the trustee exercises its discretion.

A discretionary trust may be used to preserve the continuity of ownership of particular assets, such as a business, within a family. By vesting legal ownership of the assets in the trustee, the relevant individuals may be able to continue to benefit from the assets, whilst avoiding fragmentation of ownership amongst a large number of second- and third-generation beneficiaries.

In addition to the trust deed, it would be usual for the settlor of the trust to provide a Letter of Wishes by way of informing the trustees of matters to be taken into account when exercising their discretionary powers. Although not legally binding, this letter would generally be considered by the trustee to be of persuasive effect in terms of exercising their discretion.

2) For Succession Planning

The effect of a trust is to divest the settlor of ownership of the settled assets. Accordingly, upon the death of a settlor there will be no need to obtain a grant of probate or similar formalities in order to deal with the trust fund. A trust therefore provides an efficient vehicle for the transfer of assets on the death of a settlor. A trust may also be used to protect financially unsophisticated beneficiaries and to make financial provisions for those beneficiaries that may be tempted to squander the assets.

3) To Avoid Forced Heirship

Where a settlor properly disposes of assets during his lifetime by settling them on trust, the trust assets will not form any part of the settlor’s estate upon his death. This may enable a settlor to avoid forced heirship rules which may be mandatory under the laws of his domicile, residence or nationality and which would otherwise dictate the persons to whom and proportions in which a settlor’s estate will devolve.*

4) To Protect Assets

Placing assets in certain types of trusts that are held in a secure and stable political environment can protect them from a range of external risks including for example, political expropriation.

Other examples would be in situations where there may be a desire to provide for children but there may also be concerns that they are at risk due to incapacity, an unstable marriage or financial difficulties. A trust would allow for provision to be made available as and when this is required, whilst protecting against the funds falling into the hands of a third party.

‍5) To Meet Income Needs

Under a life interest trust (also known as an interest in possession trust) the principal beneficiary will normally be granted a vested interest in the income of the trust fund throughout his lifetime and the discretion of the trustee regarding the disposition of the trust fund will be limited.  

For example, the trust instrument may specify that the trustee is required to distribute all of the income of the trust fund to a particular individual during that person’s lifetime and subsequently to distribute the capital of the trust fund in fixed proportions to named beneficiaries.

6) Commercial Trusts

‍The use of a trust, as part of a commercial transaction, is now very common. For example, many companies today operate various employee benefit arrangements (as well as regular pension schemes) and invariably, a trust will be used as part of such as arrangement. But a trust is also widely used in a range of other situations such as:

• In a unit trust for the collective investment of capital;
• In off-balance sheet transactions, the share capital of a special purpose vehicle may be held by a trustee under the terms of a purpose trust;
• In an inter-creditor agreement, the rights of one creditor group may be subordinated to the rights of other creditors and regulated under the terms of a trust.

IMPORTANT NOTE

Trusts are set up for a variety of reasons and are a useful estate planning tool. However, individuals should not enter into trust arrangements lightly. Any person considering entering into such an arrangement should satisfy themselves that they fully understand any relevant tax and legal implications.

Choosing the right trust is crucial and this is where professional advice is essential. We will be publishing further articles on trust that will provide more in-depth information on specific types of trust.

*This does not apply if the Settlor is a Jersey domiciled individual and among the beneficiaries are a spouse/civil partner or children due to Jersey's inheritance laws. In this instance, further advice should be sought before establishing your Trust.

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