April 2020
TH E USE OF TRUSTS
IN DEFENCE OF THE TRUST
Guy Abrahams, Partner, Private Client at leading law firm Forsters, explains why trusts remain a vital wealth planning tool
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rusts have taken a battering over the last ten to fifteen years. Routinely vilified in the media, and treated with suspicion, often unfairly, by the EU, the OECD, and even the UK Government, as vehicles used primarily for money laundering and tax evasion, their many benefits for individuals, families and businesses are frequently overlooked. Tax changes and an increasing regulatory burden have also caused the trust to fall out of favour, at least in the UK. TYPES OF TRUSTS Many trusts are bare trusts, i.e. under which the beneficiaries are the economic owners but for various reasons it is better or necessary to have the assets in the name of trustees. However, there are more complex trusts which can provide a convenient and sophisticated means of holding and managing property for the benefit of others. Life interest trusts Life interest (or interest in possession) trusts are those under which assets are held by the trustees for the benefit of one or more individuals, or "life tenants", during their lifetime. The life tenant is entitled to all or a share of the income throughout their life and the trustees have power to transfer capital to them. Who is entitled after the death of the life tenant will depend on the terms of the trust. Discretionary trusts Discretionary trusts are the most flexible type of trust. The trustees hold the assets for a specified class of beneficiaries, none of whom has a prescribed interest in the trust
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fund. Instead, the trustees have discretion over whether, when and to whom (among the beneficial class) they will distribute income and capital. THE WAR ON TRUSTS Prior to 2006, certain types of trust were treated favourably, or at least benignly, for inheritance tax (IHT) purposes. These included a special trust for those under 25: the accumulation and maintenance (A&M) trust. Assets in a life interest trust were treated as part of the life tenant's estate for IHT purposes, and so subject to tax only the death of the life tenant. In 2006, the entire IHT regime for trusts changed. A&M trusts could no longer be created. Any new life interest trusts were taxed under the so-called 'relevant property regime', which previously applied only to discretionary trusts. That regime imposes a 20% charge on assets transferred into the trust (for any value over the settlor's available nil rate band, which is currently ÂŁ325k), ten-yearly charges of up to 6% of the trust fund, and also exit charges when funds are distributed to beneficiaries. The swingeing changes arose as a result of the Government's suspicion that trusts were simply being used for tax avoidance purposes, without any understanding of the protective benefits of A&M trusts particularly, and the flexibility for succession planning provided by other trusts, appreciated by people at all wealth levels. Lobbying resulted in concessions being made for trusts arising on death for bereaved minors and young people up to 25, and life interest trusts created by Will. No concessions were made for trusts created in the settlor's lifetime, with the result that lifetime trusts began
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