Can I Protect My Assets Using A Trust?

Trusts have long been recognised as a powerful tool for safeguarding wealth, but can they truly shield your fortune from unforeseen risks? Below we look into the intricacies of trusts, exploring their benefits, limitations, and the key considerations for high-net-worth individuals seeking to protect their assets.

Understanding Trusts

A trust is a legal arrangement where you (the settlor) transfers ownership of assets to a third party (the trustee) to manage on behalf of one or more beneficiaries. This structure can offer several advantages in terms of asset protection and estate planning.

Key Benefits of Trusts

1. Asset separation: Once assets are placed in a trust, they are no longer considered part of your personal estate.
2. Protection in marriage: Trusts can safeguard assets when entering into a marriage or civil partnership.
3. Generational planning: They allow you to set aside funds for future generations or provide for a spouse while ensuring assets eventually pass to your children.
4. Tax efficiency: Certain trusts can help pass assets to family members in a tax-efficient manner.
5. Legal protection: Trusts can offer protection from creditors in some circumstances, such as bankruptcy.

Types of Trusts

There are various types of trusts, each serving different purposes. Here are some common types that may be particularly relevant for HNWIs:

1. Discretionary Trusts

Discretionary trusts offer maximum flexibility, allowing trustees to determine how and when to distribute assets to beneficiaries. This type of trust can be particularly useful for HNWIs who want to maintain control over how their wealth is distributed over time.

Benefits:

• Flexibility in distribution
• Potential tax advantages
• Protection from beneficiaries’ creditors

2. Life Interest Trusts (Interest in Possession Trusts)

These trusts give a beneficiary the right to use an asset or receive income from it for life, without owning the asset outright. For HNWIs, this can be an effective way to provide for a spouse while ensuring assets ultimately pass to children or other beneficiaries.

Benefits:

• Protection of family assets
• Potential inheritance tax planning
• Provision for spouse while securing inheritance for children

3. Bare Trusts

While simple in structure, bare trusts can be useful for HNWIs in certain situations, particularly for gifting to minors. The assets are held by trustees until the beneficiary reaches the age of 18 (in England and Wales).

Benefits:

• Straightforward way to gift to children or grandchildren
• Potential inheritance tax advantages if the settlor survives seven years after creating the trust

4. Charitable Trusts

For philanthropically-minded HNWIs, charitable trusts offer a way to support causes while potentially gaining tax benefits.

Benefits:

• Tax relief on donations
• Creation of a lasting charitable legacy
• Potential reduction in inheritance tax liability

Special Considerations for High-Net-Worth Individuals

HNWIs have unique needs and opportunities when it comes to using trusts for asset protection:

1. International Trusts

For HNWIs with global assets or international families, offshore trusts can offer additional benefits:

• Asset diversification across jurisdictions
• Potential tax advantages (though careful planning is crucial)
• Enhanced privacy and confidentiality

2. Asset Protection Trusts

These specialised trusts are designed to protect assets from future creditors. While not all jurisdictions allow them, they can be powerful tools for HNWIs in high-risk professions.

3. Business Succession Planning

For those who own businesses, trusts can play a crucial role in succession planning:

• Ensuring smooth transition of ownership
• Protecting business assets from personal liabilities
• Facilitating tax-efficient transfer to the next generation

4. Complex Asset Management

HNWIs often have diverse asset portfolios including property, businesses, investments, and valuable collectibles. Trusts can provide a structure for managing these complex assets effectively:

• Professional management of diverse assets
• Continuity of asset management in case of incapacity
• Potential for pooling assets for more efficient management

Important Considerations

While trusts offer many benefits, there are important factors to consider:

1. Inheritance Tax Implications

The tax treatment of trusts can be complex. While some trusts can help reduce inheritance tax liabilities, others may incur charges. For example:

• Assets in a bare trust are treated as potentially exempt transfers for inheritance tax purposes.
• Discretionary trusts may face an initial inheritance tax charge, followed by periodic charges every ten years and exit charges when assets are distributed.

Given the complexity and the substantial sums often involved for HNWIs, professional advice is crucial for effective tax planning.

2. Control vs. Protection

Creating a trust involves giving up a degree of control over your assets. This trade-off between control and protection needs careful consideration, especially for HNWIs accustomed to maintaining direct control over their wealth.

3. Local Authority Care Fees

It’s essential to note that you cannot set up a trust solely to avoid paying local authority care fees. This would be considered a ‘deliberate deprivation of assets’ and could lead to legal complications.

4. Ongoing Management

Trusts require ongoing management and administration. For HNWIs with complex trust structures, this can involve significant time and expense. Professional trustees may be necessary to ensure proper management.

Conclusion

Trusts can be powerful tools for asset protection, especially for high-net-worth individuals. They offer a range of benefits including asset protection, tax planning opportunities, and the ability to provide for loved ones in a controlled manner. However, the world of trusts is complex, with various types serving different purposes and carrying different implications.

For HNWIs considering using trusts to protect their assets, it’s crucial to seek professional advice. The right trust structure depends on your individual circumstances, goals, and the nature of your assets. At RLK Solicitors, our team specialise in advising high-net-worth clients on trust creation and management, ensuring that your wealth is protected and your legacy secure. To learn more, get in touch today.

Remember, while trusts offer many advantages, they are not a one-size-fits-all solution. Proper planning, taking into account your unique situation and the ever-changing legal and tax landscape, is essential to make the most of what trusts can offer in protecting your hard-earned assets.