Are family trusts still relevant?

David Knott, fiduciary expert at Private Client Trust.

Following the recent publication of the Davis Committee report into tax reform and the changes suggested to the treatment of trust income, various commentators have dismissed the establishment of any new family trusts and have even gone so far as to suggest the unwinding of existing trusts.

As explained by David Knott, fiduciary expert at Private Client Trust, it is being argued that if higher income tax rates become applicable to trust income, trusts will become uneconomical.

“All this advice is premature as the suggestions of the Davis report have not found its way into law as yet and one can look back many years to various other commissions of enquiry to ascertain exactly how few of their recommendations have actually become law,” says Knott, who goes on to advise that a further caveat to the unwinding of existing trusts will almost certainly trigger a capital gains tax event, thereby wiping out a significant slice of the trust. “One should act according to what the law is, and not what you think it might be.”

“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 individuals not related to the founder. “The reasons for the establishment of the 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. The founder must be sufficiently confident that these trustees 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 the establishment and maintenance of a family trust does come with costs and some paperwork and there is no certainty that the tax regime might not change in the future. However, just as the monthly payment of insurance premiums is not looked forward to with delight, when that calamity should occur one is always relieved that the premiums had been paid. “Every benefit has an associated cost. Provided the reasons for the establishment of a family trust are sound, there is no need to delay this establishment. A trust derives its benefit over time, the longer the better.”