WHEN considering succession planning, trusts are often overlooked as they have a reputation of being complex vehicles used only by the super-wealthy. However, this reputation is misleading as trusts can be useful for providing flexibility, protection and tax planning in many different circumstances.
Trusts are frequently created by individuals wishing to provide for others without having to immediately transfer funds or assets to them outright. They can be created during a lifetime or in a will, and the person creating a trust can select its ter
ms.
Setting aside a sum of money to be shared among grandchildren and allocated to each of them when they reach a certain age is a popular option. Trustees are selected to ensure that the specific trust terms are met or they may be granted discretion on who should benefit, when they should benefit and what they should receive.
Given that none of us can predict how mature someone will be, or what their needs or circumstances will be, granting discretion to the trustees to allow for flexibility can be sensible option. To retain an element of control, the person creating the trust can be a trustee although if tax planning is a motive for creating the trust he or she (nor his/her spouse or civil partner) should not be a beneficiary.
The Finance Act 2006 brought in new rules for the tax treatment of trusts which sparked much debate over the motives for trust creation. Most significantly, there are now stricter tax rules for those trusts which allow the beneficiaries to inherit at an age greater than 18 instead of on or by their 18th birthday. Many argue that the age factor should not be a tax issue but a protection issue given that beneficiaries may not be financially astute or responsible at 18.
Many people choose to have their will written so that on their death a trust is created with assets or a sum of money to be for the benefit of a particular group of people, and name the trustees who are to determine how and when the funds shall be used. Commonly used trusts on death include those enabling the trustees to advance money or income to children for their education or maintenance, and trusts to hold assets for use by a widower/widow during his or her lifetime and directing where the assets should pass on his or her death. The latter is common for those in a second marriage who wish to ensure their spouse can still enjoy the same quality of life but that on the spouse's death the assets go down the bloodline and not to stepchildren, unless that is what is wished.
Creating a personal charitable trust is becoming a popular option. The attraction for creating your own charitable trust includes the control element and transparency. You can determine the charitable purposes and by acting as a trustee can select how to distribute the funds. If you wish, the trust can be named after you to reflect your generosity.
The trust must have recognised charitable purposes, and it must provide or intend to provide public benefit in Scotland or elsewhere, in order to gain charitable status from The Office of the Scottish Charity Regulator (OSCR). HM Revenue & Customs (HMRC) currently dictate the tax status of the trust (the need to have uniformity with charities registered with OSCR has been identified). If a trust is recognised by HMRC as charitable, special tax exemptions will be granted and any donations to the trust will qualify for Gift Aid Relief. Transfers into the trust will also be exempt for inheritance tax.
Although by their nature trusts require a certain degree of management, the annual administration process can be an opportunity to review matters and ensure that a trust is achieving its purposes. If any of us wish to provide for other individuals or assist charitable purposes then a trust should not be overlooked as it can offer a key solution for meeting our objectives in a controlled environment with contingent provisions.
Fiona McDonald is a solicitor at Pagan Osborne and the co-author of Inheritance Tax In Scotland 2007/2008 and The Elder Client – A Practical Guide
