Tim, I was reviewing my financial planning and the issue of wills and trusts came into the conversation with my wealth manager. To say the conversation became complex is an understatement. Could you clarify the uses of a trust. – Gordon.
We hear of trusts being used more frequently in financial planning, particularly in property purchase.
Most folk are bewildered by their relevance and application, falsely thinking trusts are the reserve of the rich. This is not the case and access to trust vehicles and advice is readily available – this is how the rich remain that way.
We meet many investors who have amassed wealth but have made very little provision for protecting it in the event of their demise, from creditors, ex-spouses and unfriendly tax/legal regimes.
A trust is an arrangement where property is transferred from one person (the settlor) to another person or corporate body (the trustee) to hold the property for the benefit of a specified list or class of persons (the beneficiaries).
Although a trust can be created by verbal agreement, it is normal for a written document (the trust deed) to be prepared that evidences the creation of the trust, sets out the terms and conditions upon which the assets are held by the trustees and outlines the rights of the beneficiaries. In essence, a trust is not dissimilar to a will except that assets are transferred to trustees during lifetime rather than being transferred to executors on death.
It is important to understand the trust concept and the distinction between legal and beneficial ownership, which explains a trust is governed by a sound trust law that can be enforced in a reputable jurisdiction. Trusts are a powerful tax-planning tool but they are also effective at protecting assets. Assets transferred to a trust no longer form a part of the settlor's property so they cannot be seized if a settlor gets into financial difficulties. Many of the offshore jurisdictions enacted legislation that amended their trust or bankruptcy laws and created what is now commonly referred to as the Asset Protection Trust.
Assets transferred into a trust are no longer considered as belonging to the settlor and therefore the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee. Inheritance tax would be eliminated because the trustee would not die upon the death of the settlor.
The death of the head of the family will usually result in major disruption of the family estate whether or not there is a will. In most common law jurisdictions the estate must go through the probate procedure with much delay, expense, publicity and upheaval. Probate can be avoided by establishing a trust because death will have no effect on the trust property, which will continue to be held and managed in confidence by the trustee.
Proving a will is a public procedure. The tax authorities will need a list of all the assets owned by the deceased so they can be assessed for estate duty and can be legally transferred to the executors who may then distribute among the legal heirs according to the will. In non-common law jurisdictions (such as the UAE) there will be questions of forced heirship to consider, ie the deceased will not be permitted to leave his property to whom he wishes on his death.
This is a particular problem in continental European countries and other civil law jurisdictions, as well as in countries of Islamic Law tradition. A trust can be used to overcome the problem of forced heirship. Regardless, you will need some professional guidance since there are so many forms of trusts.