A Trust is a private legal relationship created where a person (the “settlor”) places ownership of assets under the control of another person (the “trustee”) for the benefit of someone else (the “beneficiaries”) or for a specified purpose.
Most private trusts created are either:
- Discretionary Trusts;
- Fixed Trusts; or
- Life Interest Trusts
Trustees of a Discretionary Trust have ‘discretion’ as to how to distribute the income and/or capital of the trust fund, on behalf of the beneficiaries.
Trustees of a Fixed Trust have no discretion as to how the income and/or capital of the trust fund is distributed. Instead, the trustees must distribute the trust property as specified by the settlor.
A Life Interest Trust is where a specified beneficiary is entitled to income, or other benefit, from assets held in trust, for their lifetime. On the death of the life tenant, the property then passes to the person(s) next in line, known as the remainderman.
Trusts Uses
Being flexible financial and succession planning instruments, trusts can be used for a variety of purposes, including;
- To preserve assets for future generations – rather than passing all assets to the next generation only
- To ring-fence and protect certain assets
- To hold assets for young children (assets either passing on death or during lifetime)
- To provide for a child with a disability
- To provide for children and others who cannot manage their own affairs (for reasons other than a disability)
- To provide for a non-marital partner
- To provide for charities and other special groups
Why set up a family trust?
A family trust is established specifically for the benefit of members of a particular family. The purpose of creating a family trust is to protect and manage family assets for current and / or future generations.
1. Asset Protection
Property transferred to the trust is no longer owned by the settlor and therefore should not be subject to claims from future creditors, provided
- The settlor was solvent at the time the trust is created;
- they have no known debts or claims against them that cannot be discharged from their own personal property without recourse to the trust assets;
- there is no expectation of any debts or claims against them in the foreseeable future; and
- The property was placed in trust three years before any claims are made on them.
With asset protection in place, the settlor may decide to undertake a higher risk occupation or venture with no risk over the trust assets.
2. Protecting Against Relationship Property Claims
If you gift assets to your children during your lifetime, these assets may become available to their partners under relationship property laws should their relationship end. By placing these assets in a trust instead of directly in the name of the children, the children may continue to receive the benefit of those assets without the assets forming part of their personal property and therefore potentially not subject to claims from partners, subject to applicable relationship laws.
3. Protecting Family with Illness or Special Needs
A trust may be used to provide for children or other family members who require medical care or have special needs, or who are unable to manage their own affairs through either age or infirmity. One of the key benefits of a discretionary trust for those with special needs and requiring long-term care is that they can retain their social welfare and disability entitlements, which are means tested. The reason is that the child does not legally own the trust assets – they have the right to be considered for distributions from the trust. Therefore, because they do not own the trust assets, those assets are not factored into any means test carried out in determining the receipt of, or continuation of, social welfare and disability entitlements.
4. Protecting Against Spendthrift Beneficiaries
Trusts can provide for long-term protection of family assets where you have concerns about how certain family members manage their own financial affairs. The income or capital needs of family members can be provided for through a trust as their needs arise rather than handing over your assets to your children who may dispose of them in a reckless manner thus leaving them in poor financial standing long term.
5. Flexibility to React to Changes in Law
Modern trust deeds usually include provisions which allow for variation of the trust in order to deal with changes in law.
6. Succession Planning for the Family Business
Trusts can be used as part of succession planning for family business in terms of the continuation of the business. It can be difficult to establish and agree upon a clear balance of power and to have clarity of roles within the business following the retirement or death of the principal. Retiring generations may wish to provide financial security and/or career opportunities to family members, manage family wealth through future generations, maintain the family tradition in business or to support loyal employees, suppliers and other stakeholders.
Shares in a business held by individual family members may need to be sold or transferred at some future point, for example, on the death of the shareholder, a divorce settlement or a decision by the owner to sell their shares. In these circumstances, there may be a delay with the transfer of ownership. However, a trust can provide for greater flexibility and ensure ease of transition between generations.
7. Estate Planning
As mentioned above, subject to applicable bankruptcy and family law provisions, assets settled on a trust during the lifetime of the settlor do not form part of the settlor’s estate upon his or her death.
This guest blog has kindly been provided by Pearse Trust, a leading independent provider of corporate and family trust structures.
Pearse Trust Registered in Ireland. CRO Number 111529
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This marketing material is not intended to provide advice and is provided for general information purposes only.