17th November 2022
Q. We are being advised to put farm business assets including land, commercial and residential property into a discretionary trust. I understand this can protect the assets and vulnerable/underage beneficiaries but am not clear about what the downsides might be – can you advise please?
A. Placing assets into trust can be an effective way of protecting them during your lifetime, and after your death. Simply put, a trust enables the owner to place legal ownership of their assets in the control of another person or people – the trustees – for a specified purpose. This can be beneficial in tax planning, especially when it comes to inheritance tax. It can also be beneficial for succession purposes.
A common type is a bare trust, where the beneficiaries are identified when the trust is created. However, a discretionary trust can give more flexibility, especially when you wish to cater for individuals over age 18 and/or for vulnerable people. In these cases, a discretionary trust gives the trustees the power to decide who – from a defined class of beneficiaries – is to benefit, how much and when.
This can be a useful way of ensuring a trustee can react to changing circumstances and especially appropriate in situations where there may be an unpredictable future need – for example a grandchild who may need more financial help than other beneficiaries at some point in their life, or beneficiaries who are not capable or responsible enough to deal with the assets themselves.
Deciding whether a trust of this type is suitable requires a full understanding of the assets involved – their values, whether they are owned by the individual(s) involved or by a business, partnership, or company and whether they may qualify for relief from inheritance tax.
With a full understanding of the circumstances, your legal advisor will be able to help you decide whether a discretionary trust is a suitable structure. If so, you should accompany the trust with a (non-binding) letter of wishes, to guide your trustees on how, all things being equal, you envisage they might exercise their discretions – for example, how and when trust income is to be distributed and to whom; and when might capital distributions of, say, buildings or land or cash realised from the sale of assets be considered appropriate.
In handing over legal control of your assets to another, you will want to select your trustees carefully. You will also want to ensure that they fully understand their responsibilities and are accountable for their actions. Your trustees will be required to register the trust and to prepare annual accounts and tax returns – although in most cases, professional advisors would be instructed to help them with these tasks.
As with any important business and life decision, take time to consider your options and ensure you are advised well on the benefits and potential downsides. Going into the process without a full understanding of the implications of setting up a trust, and the possible alternative structures, to deliver your vision would present risks that may outweigh the benefits – but careful planning and reliable trustees can deliver an outcome that secures your assets and your beneficiaries’ prosperity for the next generation and beyond.
If you would like to discuss and of the issues raised in this article, please contact Gavin Smith.