These assumptions are based on the argument that if higher income tax rates are applied to trust income, they will become uneconomical.
“All this advice is premature as none of these suggestions have become law yet. You only need look back over the years to see how many of the recommendations from other commissions have actually come into force,” says David Knott, fiduciary expert at Private Client Trust.
He adds the caveat that unwinding existing trusts could subject the beneficiaries to capital gains tax, thereby wiping out a significant slice of the trust. He also cautions that its best to wait and see whether any of these suggestions actually become law, rather than anticipating something that may not happen.
“Trusts should never be established with the intention of saving tax or estate duty. If it so happens that various taxes and duties are saved along the way, so be it, but these savings should never be the driver, says Knott.
”Did you know that trusts have been with us since the days of the Crusades? The first of the Crusades began in 1095, when armies of Christians from Western Europe responded to Pope Urban II’s plea to go to war against Muslim forces in the Holy Land. As the knights were aware that they would be absent for a long time, they left their land and property in the care of trusted caretakers to preserve these until their return, or failure to return for the benefit of their families. Over the last 1,000 years, the concept of a trust has remained whilst the law has evolved to the present and will continue to evolve.”
Knott says that trusts could be established to hold any class of growth asset for the benefit of designated beneficiaries. These beneficiaries could be the children or grandchildren of the founder or even unrelated people. “The reasons for establishing a trust could be that the beneficiaries are too young to manage assets; may not be financially prudent as yet or that the asset itself cannot be easily subdivided into portions, for example a holiday retreat or a business interest. Trusts are also used to keep separate capital assets from trading assets.”
The trust capital is managed by trustees initially nominated by the founder, who must be sufficiently confident that they will continue to manage the trust in good faith even after his death. These trustees must be financially sensible persons of good standing with the interests of the founder and beneficiaries at heart,” says Knott. “By not owning the asset but having the enjoyment thereof via the trust, a beneficiary is protected against their own rashness, insolvency or bad marriage decisions.”
Certainly establishing and maintaining a family trust does come with costs and some paperwork and there is no certainty that it won't be affected by tax reform in the future. “Every benefit has an associated cost. Provided the reasons for the family trust are sound, there is no need to delay setting one up. A trust derives its benefit over time, the longer the better.”
