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The Benefits of Creating a Family Trust

You may be considering setting up a family trust, it is important to understand the values that creating a trust as only writing a will can bring your family. 

What is a Family Trust?

A trust exists whenever one person, a settlor, transfers assets to another person, a trustee, to hold for the benefit of a third person or people, (the beneficiary).  A family trust is therefore a relationship involving:

  • a settlor, who creates the trust and decides what goes into the trust deed; and
  • the trustees, who hold title to the trust assets in their own names and deal with them as instructed in the trust deed; and
  • the beneficiaries, who receive the benefits from the trust.

Beneficiaries May Include:

  • discretionary beneficiaries, who may receive a benefit at the discretion of the trustees.
  • final beneficiaries, who are entitled to whatever funds are still left in the trust when it is wound up
  • primary beneficiaries, who are discretionary beneficiaries given some sort of priority ahead of other beneficiaries.

Why should we consider creating family trust? 

Marriage and Divorce

Globally, more people are part of ‘non-traditional’ families, e.g. divorced with children, second marriages, single parents, or same-sex couples. Children increasingly experience a variety of family arrangements due to rising divorce rates, cohabitation, remarriage, and even surrogacy. 

Trusts can provide certainty. A house, often the most valuable family asset, is hard to divide but a trust can give stability to children by deferring the sale of the family home.

Trusts are less contestable than wills which can be beneficial if there is family division. 

Families can use trusts to :

  • Set assets aside for the future and protect the wider family’s interests. 
  • Help transfer assets and protect the surviving spouse. 
  • Allow a spouse to live in a house until the children are of an age when the house can be sold. 

Succession Planning

People use trusts to benefit families, causes, people, or charities they care about or to protect minors (or those not felt capable of managing assets) who need an income or a place to live. 

A settlor can provide, in case of their early demise, to financially support dependents, in particular minors, and protect assets (such as a house) for beneficiaries. 

Complex and blended families may require a trust to balance the financial needs of a second spouse against the financial needs of, or desire to pass property to, children from a first marriage. 

A trust remains private, whereas a will, due to probate, becomes part of the public record. This is often a factor for those who want to preserve family privacy. 

Protecting the Vulnerable

A vulnerable person is physically or mentally disabled or a minor and unable to look after themselves or their finances (UK Care Act 2014). 

Trusts are widely used to fund the care of vulnerable people, look after their needs and shield them from physical or financial exploitation. 

Most jurisdictions have strict limits on gifting assets to people, regardless of purpose, even if they are vulnerable. A trust structure has three advantages :

  • the beneficiary has no direct access to assets and cannot randomly spend them.
  • there is no limit on the amount that can be placed in trust for a vulnerable person. 
  • no outside party can access trust assets as they belong to the trust, not the beneficiary. 

(Source of Information: The Fortress Group) 

Buying a Home

Trusts help with homeownership – (grand) parents can set up a trust to provide their (grand) child with a house deposit or a loan for a future home purchase. Holding money in trust ensures:

  • it is not spent on other things 
  • it can be used for the child or grandchild most flexibly and 
  • money or home are protected in the event of bankruptcy, illness, or unexpected life event

Delaying receipt of capital to children/beneficiaries

A Trust enables settlors to instruct trustees that, on their death, payments be made to beneficiaries at the trustees’ discretion. Alternatively, settlors can instruct trustees to defer payment to beneficiaries until a specified event (i.e. marriage) or a certain age is attained.

Building a Business / Continuity of Ownership

Small Medium Enterprises (SMEs) represent about 90% of businesses and more than 50% of global employment. In emerging economies, they contribute up to 40% of GDP 

Trusts are encouraged for family businesses:

  • for tax reasons 
  • to carry on the business, manage succession and estate-planning issues
  • to retain control of the business within the family for future generations
  • to provide asset protection.

About 70% of family businesses do not pass from founder to next generation. A trust can overcome this while also providing for other family members, e.g.:

  • A business owner can set up a trust to establish an advisory board on his death to manage the business during the transition. 
  • If more than one child works in the business and it is unclear who should have control, the owner can hold voting shares until a decision is made.
  • A trust can provide direction if the owner passes before assigning voting shares. Without this, a company can lack control at a crucial time and increase the risk of failure.

Anonymity

Commercial anonymity may be desirable in negotiations for patents, trademarks, royalties, or distribution rights. 

Financial anonymity may be desirable where knowledge of provisions for beneficiaries might complicate new relationships.

About the Author
Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).
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