Setting up a family trust can be an effective way of controlling your personal assets during the course of your own lifetime and upon your death, ensuring that you have a say in exactly who benefits from your hard-earned wealth. It can also be a good way of protecting and preserving that wealth for generations to come.
The following guide to setting up a family trust looks at, amongst other things, the meaning of a family trust, the different types of trust that can be used to meet the financial needs of you and your family, together with the potential pitfalls.
What exactly is a family trust?
The family trust is a legal mechanism by which an individual, or individuals, ie; the settlor(s), can transfer personal assets into a trust fund for the ultimate benefit of others, ie; the beneficiaries.
There might be one beneficiary, or more than one beneficiary, like a whole family or a defined group of people, such as the settlor’s children or grandchildren. In some cases the settlor can also benefit from the assets in a trust. This is called a settlor-interested trust.
Assets can include money, investments, family heirlooms, land or buildings, typically the family home, together with cash savings and even shares of a private family-owned company.
The settlor(s) decide(s) how the assets in a trust should be used, usually set out in a document called the trust deed. The role of the trustees is to deal with the assets according to the settlor’s wishes, to decide how to invest or use the trust’s assets, to manage the trust on a day-to-day basis and to pay any tax that falls due.
When setting up a family trust the legal title of the trust assets will be transferred into the name of trustees, appointed by the settlor(s), to manage on behalf of the beneficiaries. The settlor can appoint themselves as a trustee, together with relatives, friends or professional adviser.
What are the different types of family trust?
There are two basic types of family trust, depending on whether the overall aim is to benefit a specified beneficiary, or rather flexible and/or multiple beneficiaries, for example, unborn children, children with different needs, or a surviving spouse and children with competing interests.
The bare trust is fixed and absolute. In other words, it grants the beneficiary an immediate and automatic entitlement to their share of the trust property upon attaining the age of majority. This means the assets set aside by the settlor(s) will always go directly to the intended beneficiary upon turning 18.
The discretionary trust, on the other hand, is much more flexible. By granting the trustees a certain amount of discretion as to how, when and to whom the trust fund is distributed, this allows the settlor to make provision either for future generations, or for sibling beneficiaries at different points in time.
The interest in possession trust allows for different interests in the trust property. Typically, a single beneficiary, such as surviving spouse or civil partner, will be entitled to any income generated from the trust fund, or use of the trust property such as the family home, for a specified period of time.
If the interest is to last for the course of the income beneficiaries’ own lifetime, this is known as a life interest trust. Thereafter, the capital beneficiaries will become automatically entitled to the trust fund in full.
How can this type of trust benefit my family?
A family trust can be set up for a number of reasons, including to pass on assets while you are still alive or when you die. The family trust can be a living trust, taking effect during the course of the settlor’s own lifetime. It can also be what’s known as a testamentary trust, taking effect only upon the settlor’s death.
Once assigned to the trust, assets are no longer legally the property of the settlor(s) and, accordingly, are generally safeguarded from creditors, financial setbacks, family disagreements, spendthrifts, lawsuits, the long-term cost of care home fees and even the grant of probate. As such, trusts are a widely used as a safe haven for family and business assets.
The trust can also be used to control and protect assets for a family member who is too young to handle their own affairs or, alternatively, when someone cannot manage their own affairs because they are mentally incapacitated.
Further, although stricter rules introduced by HM Revenue and Customs (HMRC) mean many of the tax advantages to the family trust no longer exist, there are still some scenarios in which the family trust can be used favourably for estate and inheritance planning.
What are the potential pitfalls of setting up a family trust?
Unfortunately, there can be several drawbacks to the family trust, not least the potentially onerous tax implications that can arise in relation to certain types of trust, both for trustees and beneficiaries alike.
Different types of trust are taxed differently, some with greater tax advantages than others, although much will depend upon your individual circumstances, including the value of the assets transferred.
It is therefore always best to seek professional advice when considering setting up a family trust, especially if your main aim is tax avoidance, as you may find you are inadvertently placing a financial and practical burden on family members that may not be welcomed.
Furthermore, once you place your assets into a trust, you no longer personally own or control them. Instead, ownership passes to the appointed trustees, who must act under the terms of the trust deed in the best interests of the beneficiaries.
Without the right legal advice, you may find that not only are you relinquishing legal title to your personal assets, in some cases you may be irrevocably giving up your right to benefit from this property yourself at any point in the future.
What is the process for setting up a family trust?
Setting up a family trust requires some key decisions, in particular, who will benefit and when. The right trust structure needs to be chosen, and the trust deed then properly executed to ensure that the trust is effective.
You will also need to give careful thought to your choice of trustees, typically a minimum of two and maximum of four people should be chosen.
Whilst the trustees must act in accordance with the trust deed, they also have certain discretions. As such, you should only appoint individuals that you trust to act in the best interests of the beneficiaries, safeguarding your personal assets for the benefit of those intended.
Once the trust is established, it should be regularly reviewed to ensure that the original trust deed, for example, where included within a last will and testament, is still appropriate.
Should I seek legal advice when setting up a family trust?
Setting up a family trust can be complicated and confusing, not least where you are looking to make provision for different beneficiaries with different or competing needs. As previously pointed out, there can also be pitfalls to look out for, such as the potential tax implications.
It is always best to seek expert legal advice from a qualified professional specialising in family trusts. Your legal adviser can explore every available option, tailoring a trust to suit the needs of your family.
Your adviser can also draft the trust deed on your behalf, ensuring that the family trust is set up correctly, and provide trustees with advice on completing any trust and estate tax return.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal advice should be sought.