Many people prefer not to think about what will happen on their death. But failure to make proper plans can leave behind a mess that has to be sorted out by our nearest and dearest, at great expense, during a time when they are emotionally vulnerable.

Making a will is one way that individuals can put their affairs in order. Under this arrangement the executors named in the will apply for a grant of probate, take possession of the assets of the deceased and then distribute those assets according to the terms of the Will.

While this is a perfectly acceptable arrangement, it can result in high administration costs (often around 4% of the total value of the estate), long time delays (normally at least one year, even for a simple estate) and very often a large tax bill.

The only real alternative to a Will is to set up a trust structure during lifetime. With careful planning this can eradicate delays, administration costs and taxes, as well as giving other benefits. For these reasons the use of trusts is increasing dramatically.

Trust Concept

The concept of a trust is an arrangement whereby property is transferred from one person (the Settlor) to another person (the Trustee) who holds the property for the benefit of specific people (the Beneficiaries). A Trust Deed sets out the terms and conditions under which the Trustees hold the trust assets. It also outlines the rights of the Beneficiaries.

A trust is not dissimilar to a will except that assets are transferred to trustees during lifetime rather than assets being transferred to executors on death. The Trust Deed is comparable to the will.

Those unfamiliar with the trust concept may be concerned about transferring ownership of their property to a Trustee. This concern can be alleviated if the distinction between legal and beneficial ownership is properly understood and the trust is governed by sound law enforced in a reputable jurisdiction.
 

For formal legal purposes the Trustee is recognised as the legal owner of the property. The persons who have the benefit of the property are the Beneficiaries. These are important distinctions. The Settlor may retain an interest in the trust - for example, be an actual or potential beneficiary - but this can have tax disadvantages for the Settlor. The Trustee must remain independent and exercise proper control over the trust property. If the person who sets up the trust continues to exercise control over the trust assets the trust may be rendered void.
 

Trusts are a powerful tax-planning tool but they also have many other uses that are of equal if not greater importance. A properly drafted and managed trust can be advantageous for any or all of the following:

Asset Protection

Trusts can be one of the most effective ways to protect assets, as assets transferred to a trust no longer form part of the Settlor’s property. This means the assets cannot normally be seized if the Settlor gets into financial difficulties, for example, as a result of bankruptcy or divorce.

The rules of many onshore jurisdictions may, in certain circumstances, order the trust assets to be transferred back to the Settlor. This could arise if a creditor is able to prove that the Settlor transferred assets into trust with the intention of avoiding a current or future liability, or if the liability arose within a statutory period after the transfer into trust.

To overcome this problem many offshore jurisdictions have enacted legislation creating the 'Asset Protection Trust'. This protects assets transferred into trust as long as the Settlor is solvent at the time of the transfer and does not become insolvent as a result of it. For maximum security it is important to set up a trust in an offshore jurisdiction that has enacted this type of legislation.

Tax Planning

A correctly structured and administered trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty.

Avoiding the Expense and Delays of Probate

In most common law jurisdictions an individual’s estate must go through the probate procedure. This can cause delay, expense, publicity and upheaval. By establishing a trust, probate can be avoided. Death has no effect on the trust property, which will continue to be held and managed in confidence by the Trustee.

Confidentiality

Proving a will is a public procedure and therefore entirely unsuitable for those wishing to keep details of their assets confidential.
 

The only legal alternative form of asset transfer is via a trust. This would generally save estate duty and keep the trust assets confidential.

Avoiding Forced Heirship

Forced heirship is a particular problem in continental Europe and other civil law jurisdictions, as well as in countries of Islamic tradition. A trust can be used to overcome this problem if care is taken to select a jurisdiction for the trust that has an appropriate trust law.

Estate Planning

Many people prefer to make more complex arrangements for the distribution of their assets. These might include providing a source of income for a widow or making provision for the education of children. A trust is probably the most satisfactory and flexible way to make arrangements of this kind.

Preserving Family Assets

Preserving family assets, or increasing 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 the heirs, but retained as one fund. The fund can then accumulate further with provision for payments to members of the family as necessary, while preserving some assets for later generations.

Continuing a Family Business

A person who has built up a business will often want to ensure that it continues after their death. If the company shares are transferred into a trust prior to death, the unnecessary liquidation of the family business can be prevented.

In a situation where family members have little business experience, the Trustees could be instructed to retain the shares, keep the company running, and provide payment to members of the family from dividend income. The terms of the trust will ensure that the individual’s wishes are observed.

Gaining flexibility

A discretionary trust can provide a structure that is capable of rapid change as circumstances demand.