The subject of trusts can generate some complex tax and legal questions. Trusts can be extremely useful not only for inheritance tax planning but also in ensuring money ends up in the right hands at the right time. This is particularly true of discretionary trusts.
A trust is usually set up by an individual, called the “settlor”, who passes control of the assets to the “trustees”, whose job it is to look after them for the “beneficiary” (or beneficiaries).
In the case of a discretionary trust, the beneficiaries can be specific individuals but also broader ranges of beneficiaries such as children, grandchildren, or great grandchildren.
No individual beneficiary has an absolute right to the trust assets. It is the trustees that decide when and how much any beneficiary benefits from the trust. As such, they provide a significant level of control, but they can also provide protection too.
Albatross Divorce Rates Soar
In November 2021, the BBC reported that Albatrosses – apparently one of nature’s most loyal creatures – are ‘divorcing’ more due to climate change and warmer water temperatures. Traditionally viewed as good luck for ancient mariners lost at sea, could this also be an omen of things ahead.
This April, UK laws will allow for ‘no-fault divorce’, which means no wrongdoing needs to be proven for divorce to be granted. Whilst divorce rates fell slightly in 2020 compared to 2019, industry commentators have suggested that a combination of simpler filing and a ‘lockdown hangover’, could lead to record numbers in the next couple of years. A significant amount of your hard-earned money, originally intended for your children or grandchildren, could therefore be lost in the divorce process.
For those considering a discretionary trust or those who have established one historically, there remains a challenge of when to distribute funds to beneficiaries at the right time.
Maybe they’re in early-stage relationships; maybe they’re already married, and you don’t like their spouse (it has been said before); or maybe you like their spouse, but you’re still concerned about the potential for divorce.
Intergenerational planning is about making sure that the right people get the right amounts at the right time, and for a lot of our clients, they want to make sure their wealth is protected and passed down their bloodline to children and grandchildren. Let’s take a closer look at the below example.
Ken and Sue have an only child, their daughter Heidi. Heidi marries Andy and they decide to provide support to the newly married couple of £150,000 so they can purchase a home with more space as they look to start a family.
A few years later, Andy starts a business which is not particularly successful and takes on numerous debts to finance it. He’s not particularly savvy with his finances and tends to spend money on a lifestyle he doesn’t have the means to sustain.
Ongoing arguments about household finances prompts Heidi to start divorce proceedings. All of Heidi’s assets including her recent inheritance are declared in the divorce and as such, Andy receives half of Heidi’s inheritance.
Andy later remarries having children with his new wife. This means that half of Heidi’s inheritance which Ken and Sue had carefully accumulated over their lifetime now belongs to Andy and his new family.
What could have been done differently?
Ken and Sue could have set up a trust specifying Heidi as beneficiary. Depending on the wording in the trust deed, the trust could have made a loan to Heidi with nominal or no interest.
In doing so, the trustees provide financial help using the trust assets, however, this remains as a debt to the trust and essentially sits as a debt on the marital estate. Thus, it provides an additional layer of protection in the event of a future divorce.
Now, no-one wants to think that they or a loved one will become another statistic, however surely it’s worth considering this added layer of protection…just in case?
This blog is intended as an informative piece and does not construe advice. If you have any further questions, please don’t hesitate to get in touch with us using the form below or by reaching out to your usual Equilibrium contact.