Most of us will have considered what we want to happen to our assets when we die. We may have decided to leave them to our spouse, our children or perhaps a charity close to our hearts. And it’s likely that most of us have written a will to ensure our wishes are taken into account once we’re gone.
But there’s another option worth considering. More and more people are setting up trusts in order to have greater control over their assets – and, contrary to popular belief, these aren’t as complicated as they may seem.
What is a trust?
Put very simply, a trust is a legal agreement between an individual (known as the settlor) and his or her trustee/s. For the sake of clarity, we’ll call the settlor Robert in this instance.
Robert signs the legal ownership of his assets over to at least two individuals or one company, known from then on as his trustee/s. Depending on the type of trust, Robert can act as both settlor and trustee. The trustees are then tasked with managing the trust as laid out by Robert in a legal document called the trust deed.
Within this document are the names of Robert’s beneficiaries; individuals or corporations who will ultimately benefit from his assets. Usually, these will be Robert’s family members such as his wife, children or grandchildren. Some trusts will give Robert the flexibility to benefit from his own assets if he so wishes.
The assets of the trust are safe and secure due to hundreds of years of common law precedent enshrining the protection of the assets to any legal or financial problems that the trustee may face.
The advantages of a trust
There is a number of advantages to setting up a trust. Amongst these are:
Avoiding the probate process in the event of the settlor’s death
Trusts can be divided up between beneficiaries with the simple production of a death certificate, meaning bereaved parties do not need to go through lengthy probate proceedings. Speeding up the process in this way can be a real comfort to loved ones at a difficult time particularly as probate can take up two years and cost six per cent of the value of the estate.
Keeping your financial affairs confidential
Unlike wills, specific details of trusts are not in the public domain unless a court order has been granted. This means that the settlor’s financial affairs are kept under lock and key; particularly important when the individual has a large estate.
Avoiding forced heirship issues
In some countries, assets must legally be inherited by certain family members. By establishing a trust, settlors regain the power to decide where their money goes and how much each beneficiary receives.
Avoiding hefty inheritance tax bills
When an asset has formed part of a trust for seven years, under UK law it is no longer legally part of the settlor’s estate and, as such, is not subject to inheritance tax once they die. This can make an enormous difference to the sum total that the beneficiaries receive. Other savings can be made in terms of capital gains and income tax through setting up a trust.
Protecting your assets from creditors
Establishing a trust gives the settlor confidence that his or her assets will be safeguarded in the event of divorce or bankruptcy. However, it’s important to bear in mind that a trust cannot be set up if the threat of bankruptcy is already imminent.
A succession plan that survives your death
The trustees are not obligated to transfer the assets to the nominated beneficiaries upon death, as they would with a will, they can continue to manage the settled funds into the future. This is useful if the beneficiaries are in your estimation not yet ready to receive the funds that you have set aside from them. The trust is flexible enough so that you can define at what age those beneficiaries can receive the set aside funds and in what percentages at each point.
Choosing the trust that’s right for you
As with most financial products, there are a variety of trusts to choose between. It’s important to seek the advice of a qualified financial expert such as our advisers at BlueStar AMG – but in the first instance, here are some of the most popular trusts available:
The most flexible trust available, as it gives the settlor the opportunity to act as a trustee as well as name him or herself as a beneficiary. The named beneficiaries can be changed as circumstances dictate, while the amount to which they are entitled can also be amended if necessary. A discretionary trust gives the settlor confidence in knowing that he can benefit from his own assets if needs be.
Discretionary gift trust
This option is suitable for those who do not need to financially benefit from their assets in the future, and as such are happy to put them in trust now. This is particularly useful for those who would like to avoid their beneficiaries paying inheritance tax in the event of their death. Trustees and beneficiaries can be changed if necessary, offering an element of flexibility.
Discretionary loan trust
This kind of trust sees settlors lending capital to their trustees, who invest it on the settlor’s behalf.
The settlor can access their capital at any time, but have the added security of knowing they are also planning for inheritance tax mitigation. A discretionary loan trust can also provide an extra income for the settlor if required.
Discretionary wealth protector trust
In these trusts, the legal titles to a settlor’s assets are held outside their country of residence. This is particularly useful for settlors who live in a country where law dictates what happens to their assets in the event of their death. Under this kind of trust, if a beneficiary becomes bankrupt, their right to their portion of the fund becomes void.
As can be seen, there is a number of obvious advantages to setting up a trust.
Please note that beijingkids does not necessarily endorse the views presented in this article.
Mark Matlaszek has lived in China for over ten years and is the director of BlueStar AMG in Beijing. He has been helping expats plan for their retirement for the last decade, as well helping parents plan for their children’s future education fees. For more information on the company, visit www.bluestar-amg.com. If you would like a free consultation, contact Matlaszlek directly at firstname.lastname@example.org.
Photos: epSos, Danxoneil (flickr), Rexem (deviant art)