In part one of the family trust series we looked at the added benefits and assurance that family trusts or a will trust can provide you with, particularly when compared with a standard will. A family trust can be a great option to ensure that your hard-earned assets go exactly where you want them to go, whether during your lifetime or posthumously.
As with any financial arrangement, there are considerations to take into account before you set up your family trust, to ensure that you achieve your desired results. Let’s have a look at some of the key considerations to make before proceeding with your trust.
Who to name as Beneficiaries
In a trust, the key persons are the Settlor, the Trustees and the Beneficiaries. The Trustee is the company or individual to whom you have handed over possession of your assets to; the beneficiary is the person(s) to whom you have nominated to receive the benefit of those assets. The Settlor is the individual whose assets are placed into the trust. A pivotal benefit of a trust is the power it gives you to ensure assets only go exactly where designated.
For example, two children named as beneficiaries will be the sole recipients of the trust assets, regardless of who they marry, divorce or otherwise associate with. Only those named as beneficiaries have any rights to the trust assets, so it is important to consider every person you want to benefit from your trust arrangements. Additional beneficiaries can be added at a later date or indeed removed if required.
What type of trust
The flexibility of trusts is another key component to there being an effective estate management solution. There are different kinds of trust, each catering to different requirements, so your potential trustee, tax adviser or legal adviser can advise you on the most suitable kind of trust for your needs. A ‘bare’ or nominee trust is where the trustee is only a nominee, the trustees must simply follow the lawful instructions of the beneficiary in relation to the assets held in the trust. Conversely, a discretionary trust is guided by the trust instrument and the settlor’s letter of wishes, meaning that assets are administered and distributed in accordance with the settlors’ wishes. The trustees have discretion over the appointment of income or capital to the beneficiaries, there is no fixed entitlement. The range of options provided by trusts, and any conditions/wishes of your own you wish to attach, can be generally examined and incorporated.
It’s no secret that tax laws around trusts are one of their appeals in some jurisdictions. Although in recent years legislation changes have tightened the tax benefits trusts for residents of some jurisdictions, they can often still be a very tax-efficient option depending on an individual’s personal circumstances. Trusts may have the secondary effect of giving the opportunity to defer tax liabilities or remove them altogether. Inheritance Tax may be applicable on the transfer of assets or funds into the trust by UK residents, upon the death of the settlor or at ten-yearly anniversaries. For Jersey residents this is not an issue. Each kind of trust is taxed differently, so it is definitely another issue to discuss with your potential trustee on the drawing up of your trust, and one we will look at in more detail later on in this series.
Now we’ve drawn attention to these important considerations in setting up a trust, we’re ready to have the documents drawn up. Our next article will examine the process of drawing up your trust deed, and what you can expect.
If you would like to read the rest of the series on Effectively Building and Managing a Family Trust, please click on the links below.