In this episode I am joined by Matt Braithwaite from Wedlake Bell. We discuss what a Trust is and how Trusts can be used by Family Businesses to help protect assets and ensure an element of control over what happens to assets both during the lifetime of the person setting it up and after they have died.
Matt explains the history of Trusts and how they can be used in the interview, but (perhaps slightly oversimplified) a Trust can be thought of as a box that an asset in placed within. The person putting that asset into the box has to give up any benefit from that asset and passes that benefit on to others. The purpose of the Trust though is to have some control over how these people benefit from the asset and so the person setting up the Trust appoints people they trust to look after those assets.
Trust rules are complex and you should always seek advice when considering using one, but that is a Trust in a nutshell!
Before getting into the nitty gritty of their uses, it may be beneficial to look at the terminology and language used when describing how a trust works.
Settlor – The person that is placing their asset into Trust.
Beneficiary – The individuals who are able to benefit from that asset
Trustee – The individuals or company appointed to carry out the wishes of the Settlor
Trust Asset – What is placed within the trust, this could be cash, property, shares etc.
There are different types of trust and each jurisdiction will treat trusts differently. Given the global nature of the podcast there is little merit in trying to cover all the variations in this post, but I will say it is essential that advice is taken, firstly on the suitability if trusts to your circumstances, but also their interaction with your other legal arrangements such as a Shareholders agreement, Will etc.
One other thing to point out here in terms of language and terminology is the use of the phrase ‘Succession Planning’. In a family business context, this is often the term used when discussing who should take over the running or ownership of the family business. When lawyers use it, it normally refers to what happens to your assets when you die.
It is an important distinction but helpfully Trusts can, and often are, used in both contexts.
How can a Trust be useful to a Family Business
Put simply a trust is an arrangement whereby property or assets are transferred from one person, known as the Settlor to another, known as the Trustee’s to hold that property for the benefit of a list or class of persons or entities known as the beneficiaries.
The types of assets that can be placed within a trust are wide ranging and there are implications, limits and other rules to be aware of for each but as this is just an overview the types of assets that a family business might want to consider are:
It may be that a parent wants to set up a Trust for their children and place some cash into that trust. They appoint Trustees to look after that cash in the most appropriate way for the children (beneficiaries). With cash in particular, in the UK at least, the most appropriate way to look after it is in fact to invest it so that it at least maintains its buying power in the future when the beneficiaries need it.
The Settlor may have created what is known as a ‘Discretionary Trust’, this gives the most amount of flexibility for the Trustees in how the assets in the Trust are made available to the beneficiaries, this can be accompanied by a letter of wishes that state very clearly how the settlor wants the asset to be treated and how they want the beneficiaries to use the asset in the future. The letter of wishes is not legally binding but very helpful to both the trustee and beneficiaries.
They can be used for educational purposes, to protect from predatory spouses, to allow someone who may not be responsible themselves to benefit from an asset whilst also protecting the asset from being wasted etc. plus many more.
One of the more common reasons that people tend to avoid this sort of planning is because they feel that it will mean that they will die immediately after completing the estate planning. This is exceptionally unlikely. However, even if this were the case, the outcome to your estate would be ‘better’ than if you had died without doing this planning.
There is no known correlation between those with Wills, Trusts and the like in place and mortality rates. In fact those that have completed these exercises may well have more peace of mind around their estate planning as a result of putting in place the planning. It provides a reassurance that your affairs will be looked after as you wish them to be beyond your lifetime and can help to avoid unwanted conflict and turmoil in the family at a time when emotions are already running pretty high.
As with most things, proper planning helps us to avoid nasty surprises.
Trusts are not suitable in all circumstances and so advice is essential. It may be that when you speak to your lawyer about your estate planning that they highlight you have an issue with Inheritance Tax, or that if you were to run a scenario that ‘bumped you off’ where your assets ended up may not be how you would want.
Matt makes the point really well in the episode that you should never let the tax tail, wag the dog, and this is true with Trusts also.
It is worth remembering that Trusts are a legitimate and accepted form of estate planning, they are not the preserve of the ultra wealthy and they allow you to retain some control over your assets and how they are used beyond your lifetime.
Matt advises UK and international individuals, families, trustees and beneficiaries of trusts and family offices on UK tax, estate planning and succession issues. He acts for high net worth individuals and families including business owners and entrepreneurs.
Matt advises on the establishment and use of trusts and other wealth holding structures and also on the succession of family trusts and businesses and governance issues. Matt also provides UK tax and structuring advice in relation to the ownership of UK property. Matt also advises on Wills and general trust law and acts as a trustee of family trusts.
Matt joined the award winning Private Client team at Wedlake Bell in October 2018 as a partner and works closely with Partners across the firm, in particular, within the Corporate and Funds team and spearhead’s the firm’s Business of Succession campaign which demonstrates the firm’s joined up approach to advising wealthy families and their family offices.
Matt is a full-time member of the Society of Trust and Estate Practitioners (STEP) and Co-Chair of STEP’s Business Families Global Special Interest Group Steering Committee.
Matt trained at Bath-based Stone King and upon qualifying as a solicitor in 2005 he practised in Bath before moving to London with Stone King in 2008 to develop the firm’s private client services.
In 2011 Matt joined BDO in London as a Senior Tax Manager in their Private Client Services department before moving back into the legal world in 2013 to take up a Senior Associate role in the Private Wealth department of Bircham Dyson Bell (now BDB Pitmans).
You can get in contact with Matt here: https://wedlakebell.com/people/matthew-braithwaite/