“Trusts aren’t really useful anymore” is a phrase that has been thrown around often in recent times. While it is true that trusts have become less useful in a couple of areas they have previously been used for, trusts remain a highly useful structure. Two reasons for this are the liability protection that trusts offer and their ability to assist in succession planning.
This article will explore both of these points to show why trusts remain a good vehicle for managing assets.
Liability protection
If you face the possible risk of personal liability (eg, if you run a business then you may have an increased chance of facing creditor claims), then you will want to think about how your personal assets are protected – and trusts remain an effective tool for this purpose. This is due to the fundamental nature of trusts, which is the split of ownership of assets between Trustees (who together hold the legal title to those assets) and Beneficiaries (who together hold the beneficial title to those assets).
So, if you have put assets into a trust that you are a beneficiary of, while you may still receive the benefit of those assets (depending on the terms of the trust), you don’t ‘own’ them in your personal name – even though if you are also a trustee, you (along with the other trustees) would still be recorded as the legal owner of those assets. As a result, were a claim to be made against you in your personal name, the assets you have put into the trust could have protection from that claim.
To use a classic example, let’s say a person and their partner – ”A” and “B” – have put their family home into a trust. Under that trust, A, B and their children are the beneficiaries and A, B and an independent trustee are the trustees. A’s business has failed and there are debts owing to creditors that A owes in their personal name.
In this situation, those creditors may look to claim against A and force the sale of the family home in order for A’s debts to be repaid. A can respond however and say that the home is not owned by A personally, but the trust. The house could therefore be protected from the claim. This is an over simplified example and there is a bit more to it (and we would recommend you seek legal advice were you face such a situation), but it provides an effective example of the benefit a trust structure can bring and why it remains a good vehicle for managing assets.
Succession planning
This is the process of planning how your assets will be inherited and used by the next generation. It can be a tricky exercise at the best of times, but only gets more complicated where:
- the number of people you want to benefit increases;
- you want to benefit those people in a particular way; or
- the assets you are dealing with are complex or of a high value.
In those situations, having a trust through which you can manage your assets can make succession planning significantly easier, for a few reasons.
Firstly, when you set up a trust, you define the list of beneficiaries and therefore who can ultimately benefit. Secondly, when you set up a trust, you decide its terms and the trustees of the trust (who will make the decisions on how your assets are used and distributed) are required to act in accordance with those terms, meaning you can specify how the assets are to be used.
So, say you wanted to establish a fund to be used for education purposes of successive generations, a trust would be an effective vehicle to manage this. Likewise, if you wanted to provide for one of your children who has trouble managing their personal finances, a trust could be established to ensure the funds are prudently managed by the trustees, for the benefit of your child. Trusts are also extremely useful in farming contexts, where you may wish to ensure the farm assets are inherited by the next generation and continue to be operated in the manner you intend. Again, we can see how trusts are an incredibly useful tool for both succession planning and managing assets.
It is important to note here that individuals shouldn’t be trying to ‘rule from the grave’ through a trust, so its terms shouldn’t be too restrictive. Among other reasons, this is because what you might think is a good way to run a trust now may change in the future. Giving future trustees the flexibility to manage trust assets appropriately is crucial to effective succession planning.
Conclusion
Trusts can help to protect you from personal liability and are an effective tool in succession planning for future generations. However, it is important that trusts are set up for the right reasons. Trusts are a more complicated structure through which to hold assets and there are duties and compliance obligations that come with them. You also need to keep abreast of changes in trust law over time (eg, there were significant changes made under the Trusts Act 2019) to ensure the trust is being administered properly. Where the right circumstances exist however, the benefits will far outweigh those additional factors.
If you are considering setting up a trust, or would like advice on an existing trust, please get in contact and we will be happy to assist.
