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The writer is a partner at law firm Maurice Turnor Gardner
I am a great fan of trusts. The trust as a concept has existed for many centuries and it has adapted and evolved with the times. Its resilience and flexibility are remarkable, from holding land to protecting family businesses, and it can be the most useful tool for strategic planning. The UK tax rules may have impacted the use of trusts but they can still play an important role.
But if you are contemplating setting one up, there are some key points on which you need to reflect.
It is essential that you establish the purpose of the trust. Is it for succession planning, asset protection for your heirs, mitigation of tax, confidentiality? To get the best outcome, you need to engage professional advisers and discuss your ambitions with them. There needs to be clarity as to your purpose: a muddle can undo the best plans.
I urge clients to discuss the proposals with their families. It is easy to say that these sensitive matters should be raised and much harder to do so, but the damage to the family dynamic can be great if steps are taken without such discussions. I shall never forget having to break it to the family, after my client had died, that his will left the shares in the family business unequally between trusts for the benefit of his two children.
There was considerable shock that the division was unequal, particularly as no explanation had been given. The siblings did reconcile to the split in the end, but this has provoked a schism among his grandchildren, who still see it as unfair.
It may sound simplistic, but think carefully about who the beneficiaries of the trust will be. If you use the word “children”, you need to understand that, depending on the context and make-up of your family, it can be argued that the expression includes stepchildren and non-biological children who have been treated as your own. This may or may not have been your intention.
In addition, confidentiality may be at risk. If you found out you were a beneficiary of a discretionary trust (even just named in one, without the settlor intending you to get anything), you could demand the trust deed and its accounts and then make a great deal of noise about why you should receive a benefit.
We have had problems where the beneficiary class included the spouses of children, who then became embroiled in matrimonial disputes. The spouse’s interest may give rise to a claim which, even if not successful, can put pressure on any divorce negotiations. If the purpose of the trust is to benefit only a small class of people such as lineal descendants, then make sure it is tightly drafted.
The key actors are the trustees. Choosing trustees is extraordinarily difficult. Should they be individual or corporate, onshore or offshore? If an individual, what happens if they retire or die? If a corporate, who owns the company and what are their plans for the business? The experience of your advisers will be vital in the selection of trustees. Most advisers will have worked with a wide range of trustees and will be a great resource when it comes to evaluating the candidates.
My final piece of advice — again, easier said than done — is to ensure that the trust is set up correctly. If it is to be effective, it is essential that its formalities are respected. Courts are littered with cases where the establishment of the trusts have been challenged.
The most important issue is control over assets. To be effective, the control must leave the hands of the person establishing the trust and pass to the trustees. If this feature is not respected, then the planning will be vulnerable to attack.
One of the more colourful cases in the English courts involved the Russian oligarch Sergei Pugachev, known as the Kremlin’s banker. He was sued by the liquidator of the bank he had founded who claimed he had misappropriated $1bn. Pugachev had transferred his assets into five discretionary trusts to protect them from such claims. But because the trust deeds conferred such extensive powers on him, the court found that Pugachev had retained his interest in the assets so they were available to meet the creditor’s claims. The trusts had failed.
I am struggling with a similar case at the moment, where the client is reluctantly establishing a trust to hold family assets. The backdrop is one of potential infighting between siblings. I say reluctantly, because he wants to retain a level of control over the distribution of the assets and the way they are managed which is more than just influence and, in my view, is too extensive. In retaining such wide powers, he is in danger of provoking his siblings to challenge the structure. I have given him my advice, but I fear he is creating more problems than will be solved.
Trusts need to be given proper respect. They can be a wise strategy for many families, but clarity in their purpose and expert guidance in their execution are essential if they are to be a success.
