One of the most common issues to consider when discussing estate planning strategies is whether…

One of the most common issues to consider when discussing estate planning strategies is whether or not the use of a trust (or trusts) is appropriate. Although trusts have been a factor of English law for hundreds of years, they do still have an important and useful role in Wills today.

Protection of assets – young beneficiaries

One of the most common reasons to include trusts in Wills is to protect assets on death from being spent frivolously by children who may inherit without the maturity to handle large sums of money. Trust structures are similarly often created in Wills to pass assets to chosen trustees to look after on behalf of young beneficiaries. The trustees then have the responsibility to manage the asset and distribute to the beneficiaries when they believe the beneficiary is mature enough and their personal circumstances stable enough to cope sensibly with a substantial inheritance.

There are two commonly used trusts which give the trustees a differing amount of discretion.

1. Life Interest Trust – the trustees have discretion over capital only. Income produced by the trust assets belong as of right to the beneficiaries.

2. Discretionary Trust – the trustees have complete discretion over capital and income. The beneficiaries have no absolute right to anything until the trustees decide.

A Life Interest Trust is a commonly used structure because of the flexibility the trust affords. The beneficiaries have the right to income and the right to live in any trust property. The capital however, is controlled by the trustees until such time as they feel it is appropriate to give the beneficiary capital outright. The trustees make their decision based on their own judgment but also with reference to any written guidance from you as to how you would want your trustees to exercise their discretion.

The more robust discretionary trust option is useful if, for any reason, trustees ought to have discretion over both capital and income. Similarly, there may be a need to ensure that a particular beneficiary is not seen to derive any benefits from an estate – for example in the event they are going through or likely to go through a divorce.

Protection of trusts – Divorce

As set out above, a beneficiary of a discretionary trust has no right to either capital or income. The beneficiary only has the right to ask the trustees to exercise their discretion in his/her favour.

Although there is a duty in divorce proceedings to disclose the existence of any known interest in a discretionary trust, how it comes into play in the divorce settlement will depend upon the powers afforded to the trustees in the trust documentation and the extent to which they have exercised their discretion in favour of the divorcing spouse prior to the divorce.

In order to seek to maximise asset protection, any trust that has a broad class of beneficiaries is likely to be more difficult to link the trust with a particular marriage. This is particularly so if any prospective spouses of beneficiaries are excluded but future generations are included.

The trustees can still decide at a later date to bring the trust to an end and appoint assets out to the beneficiaries but they will only choose to do so once any divorce proceedings are completely finalised. Trustees also have the power to loan money to a beneficiary so that the loan can be recalled to the trust at any time.

In summary, although the use of trusts can seem complex there are still a wide range of uses for trust structures in a Will which offer much needed flexibility.