As a whirl wind 2020 draws to a close, it sets the scene for UK-resident non-domiciliaries to begin considering their plans for 2021, particularly for those who will become deemed-domiciled.
Trusts can play a key part and, whilst the tax protections afforded by “protected settlements” tend to command the spotlight, they have many non-tax related advantages which can help meet the many demands, desires and concerns of prospective settlors.
Clients are often advised to have a will in place to ensure their affairs are in order and to minimise the burden for family members having to deal with their deceased relative’s estate. Whilst this is sound advice, in some cases trusts can prove far more effective and efficient.
Where prospective settlors personally hold assets multi-jurisdictionally, a grant of probate to the will is likely to be required in each jurisdiction the assets are located. This can be onerous, expensive and time-consuming and there may be estate duties and taxes payable before the assets can be distributed. Assets held in trust however, would continue to be held in accordance with the terms of the trust and the death of the individual would have no bearing on its continued operation or how the beneficiaries would benefit thus negating the probate formalities, and associated costs and complexity.
Amendments are frequently made to individuals’ wills throughout their lifetime, though each time legal formalities must be followed to ensure the will’s validity. A Jersey trust mitigates these formalities through the use of a “letter of wishes” which can be updated, amended or revoked quickly and inexpensively as a settlor’s wishes or desires change over time. This provides maximum flexibility when considering how the wealth is to be distributed.
Fragmentation of family assets upon death can be a concern for prospective settlors. They may take the form of shares in a family business, works of art or real estate which, by their nature, cannot be divided. However, through the use of a trust, individuals are able to benefit from the asset, for example by the income stream generated by the asset whilst retaining the asset intact.
There are many reasons why prospective settlors may be concerned about their intended beneficiaries’ ability to manage their inherited wealth and, whilst the word ‘control’ may not be synonymous with trusts, there are a number of ways in which trusts can provide settlors with a say in how their wealth is dealt with.
The Trusts (Jersey) Law 1984, as amended (the “Law”) states that forced heirship, or any other similar rule will not affect any transfer or disposition into a Jersey trust. As a result, Jersey trusts provide testamentary freedom allowing settlors to have their wealth distributed as they desire.
Settlors who are financially sophisticated and capable of handling their own investments may have reservations about their heirs’ ability to do so after their death or about the way investment decisions may be dealt with generally. The Law allows the settlor to grant reserved powers which can endure beyond the settlor’s lifetime and be vested in a person or committee of people of the settlor’s choosing, which may in some circumstances be a specially formulated investment committee.
Peace of mind
By establishing a trust during the settlor’s lifetime, it allows a relationship to be built between the settlor and their chosen trustee allowing the trustee to learn the intricacies of the family dynamics, gain a broad understanding of the purpose of the wealth and insight into the vision, values and beliefs of the settlor and their family. This ensures that, if the settlor so desires, these values and beliefs endure through the trust and are instilled into future generations.
Trusts are also extremely useful in circumstances where family members are not able to deal with inheriting a large sum of money or capable of managing their own affairs for example age, profligacy or infirmity. A professional trustee will be able to help educate financially unsophisticated beneficiaries to navigate the complexities of dealing with the family wealth when the settlor is no longer around.
Similarly, beneficiaries with special needs or who struggle with addiction can be protected by a trust structure with trustees in control of the way trust funds are spent. It also facilitates a degree of independence where decisions are made by a third-party trustee rather than a family member which may be helpful in the context of a family dispute.
Trusts can also be used to help protect family wealth against the potential future liabilities of a settlor or beneficiary, including, in some circumstances those arising as a result of divorce proceedings, giving peace of mind that assets will remain in the family.
The countdown begins
The drivers for establishing a trust are vast as are each settlor’s bespoke demands, desires and concerns. Wealth planning should therefore be given deep and frequent consideration. For those becoming deemed domiciled as at 6th April 2021 the deadline is fast approaching and it is important to begin your planning now.
Whatever a client’s need or reason for wanting to set up a trust, tax is not the only driver, and an experienced trustee, like VG, will work alongside clients and their advisers to ensure that the trust structure meets the needs and desires of the settlor and beneficiaries.