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17 June 2013 | Comment | Article by Matthew Evans

Thinking of setting up a trust? Choose your trustees wisely.

A bid by a multi-millionaire businessman to protect his assets for his family tore his family apart, a court was told this week.

On his death, rather than simply leaving his assets to his wife under his will, he had left them in a trust where his wife was one of the beneficiaries’ together with his children. This method is often used to protect the surviving spouse’s ability to continue to use the assets, but also to protect them for the next generation in the most tax efficient way. However, in this case, the businessman’s son tried to prevent his mother getting any of her late husband’s assets.

We’ll look at what happened in the case, what the husband could have done differently to avoid the problems that arose and whether the story holds any lessons for people in the same situation today.

Using a discretionary family trust instead of a traditional will

When John Wild died in June 2009 at the age of 78, his assets included a successful business empire worth £2.3m and a country home in Warwickshire worth more than £1m. He left a widow, a son, a daughter and six grandchildren.

Rather than making a traditional will, Mr Wild set up a “discretionary family trust” to ensure that his wealth was passed to his widow, Susan, 79, daughter Julia, 47, son Ian, 54, in the most tax-efficient manner possible.

But the plan backfired when his son and his widow fell out over his conviction that she had cut him out of her own will. The son refused to agree to his mother being paid her £500,000 share of the assets within the trust.

As one of the trustees, he had a veto over any transfer of assets from the trust to any of its beneficiaries, as unanimity among trustees is required for money to leave these trusts.

The court ruled in favour of Ian’s mother and sister and ordered that he be removed as a trustee. The ruling means the mother’s money will be released immediately.

Sarah Cash, an expert on trust law and a partner at Hugh James, a firm of solicitors, described discretionary family trusts as “a useful way of passing assets down to the next generation in a tax efficient manner.

Let’s assume that the husband sets up a discretionary trust for his family either during his lifetime or under his will, and on his death, his assets go into that trust. Provided that the value of his assets are under the inheritance tax free amount when he dies (currently £325,000) or if they are over that they are exempt from inheritance tax as the assets comprise of a business or a farm, this won’t affect the husband’s own inheritance tax liability, and can reduce the wife’s own inheritance tax liability,” she said. “The husband also keeps control of the assets during his lifetime, which is not the case if he simply gives the assets away during his lifetime as part of his succession planning strategy.”

When the widow eventually dies, only those assets that have been transferred out of the trust and into her direct ownership are counted as part of her estate and liable to IHT. By transferring assets only as and when they are needed, there is a good chance of keeping the widow’s estate below the threshold for inheritance tax, despite much larger sums being in the trust.

No potential beneficiary has an absolute entitlement

“Under a discretionary trust no potential beneficiary has an absolute entitlement to any of the trust assets. The trustees have discretion as to what stages and in what proportions the trust assets are divided between the beneficiaries”, Ms Cash said. Instead, all transfers are at the discretion of the trustees, who, as mentioned above, must all agree.

So, if you are thinking of setting up a trust, choose your trustees wisely. “The moral of the story of the Wild case is: be careful who you choose as trustees,” she said. “We recommend having at least two, and including a professional such as a solicitor as well as family members.”

The other thing is to write a “letter of wishes” to the trustees stating how you want the trust assets to be divided up. Ensure that the letter is kept with the trust documents. But Ms Cash added: “Because no beneficiary has an absolute entitlement to any assets, the trustees are not under any legal obligation to follow the wishes in your letter.”

Trusts are normally would up either within two years of the first spouse’s death or when the surviving spouse dies. However, under the law they can last for up to 125 years. When they are wound up the assets are distributed by the trustees between the beneficiaries in accordance with any letter of wishes left by the person who had set up the trust which may stipulate an equal distribution between the beneficiaries.

Author bio

Matthew is a partner and heads up the firm’s private wealth offering. He is responsible for the development, implementation and long-term strategy of the team.

Matthew has a UK-wide reputation in the field of contentious probate, recognised by his clients and peers in the leading legal directories.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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