Advantages of a Trust
Trusts are a powerful tax planning tool but they also have many other uses which are of equal if not greater importance. A properly drafted and managed trust can confer advantages under any or all of the following:
Asset protection
Trusts can be used very effectively to protect assets. In simple terms, assets transferred to a trust no longer belong to the grantor and therefore if the grantor experiences financial problems the trust assets cannot be attached by the creditors of the grantor due to bankruptcy, dissolution of marriage, or a court award made as a result of, for example, a professional negligence claim. Thus, although the grantor may be declared insolvent, a portion of his assets might be safeguarded by the trust structure.
Tax planning
Assets transferred into a suitably drafted trust structure are, in simple terms, no longer considered as belonging to the grantor and therefore the income and capital gains generated by those assets are taxed according to the rules in the country of residence of the legal owners – the trustees.
Inheritance tax would normally be eliminated because the trustees would not die upon the death of the grantor. Generally speaking, trusts can be extremely effective for tax planning purposes and a correctly structured and administered trust will produce substantial savings in income tax, capital gains tax and inheritance tax/estate.
Avoiding the expense and delays of the probate process
The death of the head of the family will usually result in major disruption of the family estate whether or not there is a will. In most common law jurisdictions the estate must go through the probate procedure with much consequential delay, expense, publicity and upheaval.
By establishing a trust, probate can be avoided because “death” will have no effect on the trust property which will continue to be held and managed in confidence by the trustees in accordance with the terms of the trust.
Confidentiality
Assets in a trust are completely confidential, it’s a private matter. Assets NOT in a trust, goes to probate, with or without a will. The “probate procedure” a public procedure. A complete list of all the property owned by the deceased becomes a PUBLIC RECORD in order that that property can be assessed for estate taxes and in order that the property can be legally transferred to the executors who may then distribute to the legal heirs of the deceased according to the will.
This probate procedure is therefore entirely unsuitable for those who wish to keep details of their assets confidential.
Avoiding forced heirship
In non-common law jurisdictions there will often be questions of forced heirship to consider i.e. the deceased will not be permitted to leave his property to anyone he wishes on his death. This problem of forced heirship can be avoided by a properly drafted trust.
Estate planning
Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, and prefer to make more complicated arrangements. These might involve providing a source of income for a widow for life, making provision for the education of children or providing a fund to protect members of the family in the event of sudden illness or other disasters. A trust is probably the most satisfactory and flexible way of making arrangements of this kind.
Protecting the weak
A trust provides a vehicle by which a person can provide for those who may be unable to manage their own affairs such as infant children, the aged, the disabled and persons suffering from certain illnesses.
Preserving family assets
Preserving the family assets or increasing them is often a motive for setting up a trust. Thus, an individual may wish to ensure that wealth accumulated over a lifetime is not divided up amongst the heirs but retained as one fund to accumulate further, with provision for payments to members of the family as the need arises while preserving some assets for later generations.
Continuing a family business
A person who has built up a business during a lifetime will often be concerned to ensure that it continues after death. If the shares in the company are transferred to trustees prior to death a trust can be used to prevent the unnecessary liquidation of a family company. The terms of the trust will ensure that the individual’s wishes are observed. These might include provision for payments to be made to members of the family from dividend income received by the trustees but that the trustees retain the shares and keep the company running save in special circumstances justifying sale of control or liquidation. This may be particularly advantageous where the family members have little business experience of their own or where they are unlikely to agree on the correct way to manage the business.
Gaining flexibility
The best laid plans can, in a changing world, rapidly become obsolete. A discretionary trust can, however, be structured to provide for a system of management of property that is capable of rapid change as circumstances demand.
An irrevocable trust, is an asset protection fortress when it’s the owner of your sub “S” stock, a limited liability company, the general partner of a limited partnership, the general partner of a family limited partnership, the shareholder of an international business corporation, or other recognized legal entities.