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Trusts and Their Uses:

In English succession law, trusts have been used for centuries by the wealthy to manage their assets. Possibly as far back as the crusades. They are particularly useful where assets are held in multiple jurisdictions. But before we get to the advantages, let’s start with a definition.

 

What is a Trust?

At its core, a trust is a legal arrangement where assets are held by one party (the trustee) for the benefit of another (the beneficiary). The settlor, who establishes the trust, transfers legal ownership of the assets to the trustee, who manages them in accordance with the terms outlined in the trust deed for the benefit of the beneficiaries.

 

Parties to a Trust

 

Settlor

The settlor is the individual who creates the trust by transferring assets into it. They establish the terms and conditions governing the trust. Often the settlor retains certain powers or interests in the trust assets. This will depend on the purpose of establishing the trust.

 

Trustee

The trustee is entrusted with the management and administration of the trust assets. They have a fiduciary duty to act in the best interests of the beneficiaries. The trust law requires them to adhere strictly to the terms of the trust deed.

 

Beneficiary

Beneficiaries are the individuals or entities entitled to benefit from the trust assets. They may receive income generated by the assets, have the right to use the assets, or eventually receive the assets outright, depending on the terms of the trust.

 

Types of Trusts

 

Discretionary Trusts

In a discretionary trust, the trustee has discretion over how to distribute the trust assets among a class of beneficiaries. This flexibility allows the trustee to adapt to changing circumstances and needs. For example, a discretionary trust may be used to provide for the long-term financial security of a vulnerable beneficiary, such as a disabled child.

 

Absolute or Bare Trusts

In contrast to discretionary trusts, absolute trusts distribute trust assets among specific beneficiaries in predetermined shares or proportions. The trustee has no discretion in distribution, as the terms of the trust are fixed. Absolute trusts are commonly used in situations where certainty and predictability are paramount, such as in the distribution of specific family heirlooms.

 

Practical Application of Trusts

 

Estate Planning:

Trusts are instrumental in estate planning, enabling individuals to manage the distribution of their assets, minimise inheritance tax liabilities, and provide for loved ones in a structured manner.

 

Asset Protection:

Trusts can shield assets from creditors, lawsuits, profligate heirs, the financial impact of divorce, and other threats, safeguarding wealth for future generations.

 

Privacy:

Trusts provide families with a degree of privacy in the area of their wealth not afforded in other structures.

 

Potential Disadvantages of Trusts

 

Complexity

Trusts can be complex legal arrangements, requiring careful drafting and ongoing administration. This complexity may result in higher legal and administrative costs.

 

Loss of Control

By transferring assets into a trust, the settlor relinquishes direct control over them. While this may be desirable for asset protection purposes, it can also entail a loss of autonomy. However, in many cases, the settlor is also appointed as one of the trustees to retain some control during their lifetime.

 

Tax Implications

Depending on the type of trust and its terms, there may be tax implications to consider, including income tax, capital gains tax, and inheritance tax. These taxes may be incurred not just by the trust but also by the beneficiaries in certain cases.

 

Cost

Due to the potential complexity of administering trusts, especially where cross-border arrangements are in place, it is best to appoint a professional trustee. This will incur additional costs which are not incurred when holding assets in your own name.

 

Conclusion

 

Trusts serve as versatile tools in English succession law, offering a range of benefits such as estate planning, asset protection, and flexibility in wealth management. However, it is essential to carefully consider the specific circumstances and objectives before establishing a trust, as they can also entail complexities and potential drawbacks. By understanding the nature of trusts and seeking professional guidance, individuals can leverage these legal instruments effectively to achieve their succession planning goals.

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