There are many ways to protect your business wealth, especially when it comes to passing on that wealth to your closest loved ones and the next generation.
A popular way of doing this for business owners is through discretionary trusts. They often used as a form of protective barrier, giving you more control over how assets are passed along.
What Are Discretionary Trusts, And How Can They Help To Pass On Wealth To The Next Generation?
A discretionary trust is a form of protection that gives trustees the power to decide how much beneficiaries get from a trust, and when they get it. A beneficiary doesn’t have automatic access to the contents of the trust, and you are in control of who those beneficiaries are.
In its simplest for, a discretionary trust is a legal agreement between three parties:
- The settlor – the person setting up the trust (usually a professional body)
- The trustees – the legal owners or business assets
- The beneficiaries – the people chosen to benefit from the trust.
But why not just set a beneficiary up to benefit from your Will? There are many reasons why you’d choose a trust over a Will, it could be a child or dependant, the beneficiary may have an illness or disability that affects their capacity, or could have had a history of poor financial management. Whether It’s all, or none of these reasons, a trust allows you to retain some control over how the assets are passed on and manage the funds more effectively and at your discretion.
When it comes to setting up a trust, it’s advisable to be open with the intended beneficiaries. Discuss with them their expectations and how the trust will be set up to work. It can also be written down in the form of a guidance letter to allow beneficiaries to make decisions in accordance with your wishes.
Can Discretionary Trusts Be Used To Protect My Business Wealth?
The main reason usually given for setting up a discretionary trust as part of your business assets, is to reduce the impact of a large inheritance tax once passed on. Discretionary trusts are also valuable when considering how to pass on property. They can help you:
- Take advantage of inheritance tax business or agricultural relief, which otherwise might not be available after both you and your spouse have died
- Put assets outside your spouse’s ownership that are expected to increase in value and attract more tax (for example, land with development potential)
- Discount the taxable value of your family home by splitting ownership between a surviving spouse and a trust
- Get extra inheritance tax allowances if either you or your spouse (or both) have previously been widowed.
There’s a common misconception that setting up a discretionary trust will be enough to safeguard your business and wealth completely. As each business is different, it’s important to understand that back up forms of protection might also need to be used. This can include pre or post-nuptial agreements for example, providing harder to penetrate layers should a dispute arise.
What Else Should Be Considered When Setting Up A Trust?
The international limitations of setting up a discretionary trust should always be considered. If, for example, the trustee or beneficiary is a resident of another country, either when the trust is set up or after, the tax implications should be accounted for.
In some jurisdictions, trusts might not be recognised, or there might be adverse consequences of a beneficiary being the recipient of a trust fund. Because of this, it’s always advisable to seek expert advice to ensure you and your beneficiaries will get the most out of setting up the trust.
Our friendly and approachable team can offer support and clear guidance, advising you on what action to take to ensure your wishes are followed and your best interests are looked after. We're one of the UK’s leading law firms, and our specialist teams located across multiple offices has extensive experience with legacy planning and supporting your business.
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