Estate planning – Failure to plan your affairs in advance of death can mean leaving your estate in disorder. Many people seek to order their affairs by making a will but the probate process can result in lengthy delays, high administration costs (typically around 4% to 6% of the total value of the estate) and often tax liabilities. The best alternative is to set up a trust during their lifetime. Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make more nuanced arrangements. These might include: providing a source of income, but not capital, for a spouse for life; making provision for the education of children but not letting them have access to capital until later in life; or providing a fund to protect members of the family in the event of sudden illness or other calamities. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.
Tax planning – Assets transferred into trust are no longer considered as belonging to the settlor, so the income and capital gains generated by those assets are taxed according to the rules governing the legal owner – the trustee(s). Inheritance tax can be eliminated because the trustee(s) continue in existence after the death of the settlor. Anti-avoidance legislation in the home country of the settlor or in the location of the trust assets may seek to counteract this outcome, but a correctly structured and administered trust may offer substantial tax efficiencies.
Confidentiality – Proving a will is a public procedure. Domestic authorities will need to receive a complete list of all the property owned by the deceased in order to assess the amount of estate duty payable before the property can be transferred to the executors for distribution. This procedure is entirely unsuitable for those who wish to keep details of their assets confidential. The only other legal form of transfer is via a trust and this would generally save estate duty and keep the trust assets confidential.
Asset protection – Trusts can be one of the most effective ways of protecting assets. In simple terms, assets transferred to a properly constituted trust no longer form part of the settlor’s property and therefore cannot be seized if a settlor gets into financial difficulties. A court may, under certain circumstances, order the transfer into trust to be set aside and the trust assets returned to the settlor, but a trust can form an important part of a risk-mitigation strategy.
Avoiding forced heirship – Many civil law jurisdictions and countries of Islamic tradition have ‘forced heirship’ provisions, which create a legal obligation to distribute a certain proportion of a deceased’s assets to their next of kin and/or children. If forced heirship rules are at odds with your intentions, a trust will enable a wider or different distribution of the estate.
Protecting the weak – A trust is a useful vehicle for people who may want to provide for those who are unable to manage their own affairs, such as infant children, the aged, the sick or disabled. Trusts can allow for the independent support of those who require it most.
Preserving family assets – Preserving family assets, or growing them, is often a motive for setting up a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst their heirs, but rather is retained as one fund to accumulate further. A trust offers a mechanism for preserving family assets while offering the flexibility to allow payments to beneficiaries as the need arises. This can be further enhanced with a unified fund for investment/asset management.
Continuing a family business – An entrepreneur who has built up a business will often be concerned to ensure that it continues after their death. If the shares in the business are transferred to trustees prior to death, a trust can be used to prevent the unnecessary liquidation of a family company while providing for payments to be made to members of the family from dividend income. This may be particularly advantageous where family members have little business experience of their own or where they are unlikely to agree on running the business. This is never more applicable than in an Initial Public Offering (IPO) situation where the creation of a pre-IPO trust for major family or employee shareholdings can offer a raft of benefits.
Increased flexibility – The best-laid plans can rapidly become obsolete due to unforeseen circumstances, but a discretionary trust can provide a mechanism for managing property that is capable of adapting as conditions demand. No beneficiary has any fixed or absolute interest in the trust assets under a discretionary trust. Instead, the settlor can simply nominate a class of beneficiaries and give the trustees discretionary powers to distribute trust assets as and when they see fit. Beneficiaries only have a contingent interest and ordinarily would avoid any tax liability until such time as they receive a distribution.
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