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Abolishment of Gift Duty - Family Trusts

The Government has recently stated they intend to abolish gift duty effective from 1 October 2011. The legislation to abolish the duty is to be introduced in November 2010.

As a consequence of the above we at Turner Hopkins believe it is a good time to revisit the setting up of the family trust and the role a trust has in an individual’s asset and estate plan.

What is a trust?

A trust is an arrangement which you make usually with two or three other people (your trustees) for those people to look after your assets but to only deal with them for the benefit of the people whom you have named as beneficiaries. The trustees have total discretion on how to deal with the assets provided that they only benefit the beneficiaries. The assets are recorded in the personal names of the trustees but in dealing with those assets they must always keep in mind the interests of the beneficiaries. It is usual that the person or persons setting up the trust will initially be trustees as well.

A trust is one way we can assist our clients with planning their affairs. There are other ways we can assist clients with asset and estate planning issues including relationship property agreements, wills, companies and/or transferring ownership of your property into equal shares. One of these options may be more suitable than a trust and if you wish to discuss this further, please contact Turner Hopkins.

When looking at your asset and estate planning matters it is important to consider your affairs as a whole. If your assets are owned by a trust they will not form part of your estate and, therefore, the terms set out in your will do not apply. As the person setting up a trust you can have input in what should happen to the assets and this is dealt with via a document known as a memorandum of wishes or memorandum of guidance.

What are the advantages to forming a family trust?

  • Planning Ahead - A trust can be used as a means of giving order to your affairs, in much the same way as you might use a will or form a company. A trust allows for the orderly administration of your affairs as well as for the transfer of your family wealth from one generation to another in a planned flexible manner.
  • Flexibility - A trust has a maximum life of 80 years although it can be wound up earlier. It is obviously difficult to assess the needs of beneficiaries over such a lengthy time but a trust is flexible enough to cater for different needs of beneficiaries at various times in their lives.
  • Relationship Property Protection - It is becoming more common to see people entering into second relationships. In a second relationship the assets from the prior relationship can be separated out and protected by a trust for the children of the earlier relationship. It is also possible that the assets of the new relationship can be separated out and protected by a trust. Another area where trusts can assist is where a child’s relationship or marriage fails. Trustees can delay distribution of assets until the relationship issues have been settled. This differs from where a child receives directly their inheritance from a parent’s estate. The risk is the child uses the inheritance to benefit themselves, their partner and their children. Once this occurs, the inheritance is possibly relationship property and would be split equally upon the relationship ending.
  • Creditor Protection - A trust can protect family assets from unsecured business debts if the trust has been set up early enough.
  • Tax Savings - Whilst the trust tax rate is now the same as the highest personal tax rate of 33%, it is still possible for a trust to split the income received. Income can be paid to beneficiaries at their tax rate. If the beneficiary is on a lower tax rate the income is taxed at that rate. A trust is a good vehicle for ownership of a family business.

If you are considering forming a trust you should have more than one reason for doing so. In Turner Hopkins’ opinion a trust is a great way of providing certainty that the property and assets you have worked hard to obtain will be provided to those family members you wish to benefit.

Consequence of No Gift Duty

If gift duty is abolished as stated by the Government, and subject to there being no other changes in legislation, it will be much easier to transfer assets to a trust. There will be no need to sell the asset to the trust with a debt back to the person selling. However, the timing of a transfer may be important particularly if the person looking to transfer assets has creditor issues. If you would like to discuss your estate planning requirements and, in particular, setting up a family trust, please contact John Stirling.

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