For many years there has been a consistent attack on trusts from the tax man (or should that be tax persons?!). There is a perception that trusts are simply used for tax planning purposes and as such the more attacks there are on trusts from the tax authorities, the less useful trusts will become.

However, the truth of the matter is that many trusts are used for asset protection purposes. The tax planning is often no more than an additional benefit. One of the main tax benefits remains the inheritance tax benefit of taking assets outside a person’s estate for inheritance tax purposes.

Looking at it logically, in most cases, the objective of transferring value out of a person’s estate can be met by passing the assets directly to the children or the grandchildren and waiting for seven years before dying. This is inheritance tax planning at its simplest. All you need is a crystal ball to know 1) how your children’s lives will pan out and 2) a rough idea of when you will die. Easy peasy.

Obviously, there are some major practical downsides to this strategy and this is where trusts can be very useful. What if the children / grandchildren end up in divorce situations? What happens to the assets you have passed into their names – will they become part of a divorce settlement? Similarly what happens if one of the recipients decides that life is for living and as such they realise the value in the assets to pay for that world cruise?

Can you stop them? Not when you have given them ownership of the asset you can’t.

But if you had put the assets into a trust, you could protect those assets as a trustee. Firstly providing the trust isn’t made in contemplation of divorce or as a way of protecting assets from a particular spouse, there is an element of protection in a divorce situation. The Courts may well take the trust’s existence into account, but they can’t access the assets themselves and demand that they be distributed out. Secondly, none of the beneficiaries are able to realise any of the assets without your agreement as a trustee. Therefore unless you sanction the distribution of funds, there will be no world cruises.

There are a multitude of tax implications of passing assets into trust – for income tax, capital gains and inheritance tax, trusts have their own set of rules. However, for those families wanting to protect some of the family wealth for future generations, it is still worth taking a look at whether a trust would fit the bill.

For now, the trust lives on…