Trusts For Wealth Protection

What Is A Trust?

For individuals and families who wish to protect their personal assets or business, setting up trusts must surely be one of the best ways to do so. A trust is a legal arrangement by which money or assets are given by a person, the Settlor to a new legal entity, called the Trust. The money or assets are administered by an individual or a financial institution called the Trustee for the benefit of designated Beneficiaries.

Why Set Up A Trust?

The following are some of the reasons people set up trusts :-

· to preserve family fortune

· to protect against claims by creditors

· to protect against unforeseen financial adversities

· to ensure family business continuance

· to provide for the family and future generations in uncertain economic times

· to protect against financial extravagance or mismanagement by a beneficiary

· to make discreet and confidential financial provision for a beneficiary

· to avoid financial disruption on death

· to set boundaries in financial provisions for a beneficiary, instead of transferring all assets directly to him or her without limitations

· to avoid payment of estate duty on assets

· to ensure your own choice of beneficiaries

· to provide for worthy charitable causes

Exemption of payment of estate duty on assets

Generally, estate duty taxes are payable for any assets passing through a will (except for some exemptions). However, once a trust is set up and assets are injected into it, the trust is deemed to be the owner of the assets with immediate effects. The assets under a trust will not be subject to estate duty taxes, if injected into the trust more than five years before the date of death of the settlor. The settlor should not be one of the beneficiaries to avoid having the trust being viewed as a mere nominee arrangement to defraud creditors.

Protection against claims by creditors and unforeseen financial adversities

One of the great concerns of families with substantial assets, entrepreneurs, professional and other business people is how to protect their wealth against sudden misfortune. Entrepreneurs who stand as guarantors for their business can loose everything should the business fail. The assets under a trust are protected from seizure by your creditors if the claim is made more than five years after the assets have been injected into the trust. Claims or bankruptcy proceedings made against you will not affect the assets now owned by the trust for the benefit of your family members and loved ones.

Family business continuance and preservation of family wealth

Shares of family-owned company may be held under a trust for the benefit of individual family members. In the event of any financial reversal or adversity happening to any of the family members, such shares and therefore the family business are protected from their creditors. As the shares legally belong to the trust, the trustees are able to control the block of shares as a single unit and prevent squabbling family members from disposing of their respective shares, hence, providing continuity and protecting the family business. A family property can also be preserved for future generations and protected from creditors of family members by virtue of a trust.

The flexibility to provide for beneficiaries

Under the terms of a trust, especially a discretionary trust, arrangements can be made to distribute trust income among beneficiaries according to changing needs and individual financial situations. For example, the trustees may be able to apportion more money to a child still studying in school than to one who has completed studies and doing will in his or her career. Other trust arrangements can address the problems of dealing with a spendthrift heir who is unable to unwilling to handle money properly. Yet other arrangements can empower the trustees to accumulate trust income and grow trust capital until such time when a specific sum of money is needed, as when the beneficiary wants to go into business or for setting up home upon his or her marriage.

In other cases, sometimes the children of the setttlor may be doing well and there is no necessity to make any substantial provisions for them, especially when the inheritance may add to their liability for higher estate duty or other taxes. In such a situation, the settlor may wish to name the grandchildren as direct beneficiaries of the trust.

Types Of Trust

Trust may be revocable or irrevocable according to the terms. There are two main types of trusts:-

· Fixed trust

· Discretionary trust

Fixed Trust

The salient features of a fixed trust are :-

· It specifically names beneficiaries who are entitled to trust property or income in stipulated proportions

· the duration of the trust may be fixed, for example, 10 years

· it has certain specific objectives

· it is good mainly for estate duty exemptions

Discretionary Trust

The salient features of a discretionary trust are:-

· this type of trust allows the trustees to choose the beneficiaries from either a list of names or a class of beneficiaries, and to determine their entitlements, if any. It may also allow any beneficiary to be excluded.

· under a fully discretionary trust, creditors of the beneficiaries will not be able to claim the assets under the trust. This is because under the terms, no beneficiary is entitled to any income or asset as of right, unless determined by the trustees. Hence, beneficiaries are protected from the detrimental financial consequences of a failed marriage or a failed business.

· Insurance policies on the life of the settlor can be assigned in favor of the trustees to hold the proceeds on trust for beneficiaries.

· the trustees can be vested with the power to determine or vary the amount and proportion of the income to be paid and the distribution of trust capital.

· the trustees will have the discretion to consult with or enlist the assistance of professional, financial, legal, investment, management or other advisors in the management of the trust.

· the settlor himself can be the trustee but not a beneficiary for the full protection of a trust to apply

· properties or assets injected into the trust need not be in the name of the trustee but can be held under any other name at the discretion of the trustee

· the trustee can appoint additional trustees

Trusts To Suit Particular Objectives

Trusts can be framed to achieve particular objectives to meet specific circumstances and needs. The different trusts that reflect this include:-

· Marital Protection Trust

· Asset Protection Trust

· Life Insurance and Discretionary Trust

· Education Trust

· Trust for Maintenance and Advancement of Minors

· Business Succession Trust

· Investment Trust

Life Insurance & Discretionary Trust

This is a type of discretionary trust set up to receive the proceeds of any life insurance policy which are assigned to the trust. Upon the death of the settlor, the proceeds of the policy will be paid to the trustees of the trust who may release the funds to the executors of the settlor's estate to settle any debts. This is particularly so where the beneficiaries of the trust and under the will are the same.

Business Succession Trust

Frequently, owners of successful businesses spend most of their time and efforts building up the businesses either solely or with joint-owners without a proper exit strategy plan. The object of business succession planning is to effect a smooth transfer and succession of the business interested of the owners upon the event of their retirement, withdrawal, disability or premature deaths.

The Buy-Sell Agreement is commonly used to effect proper business succession planning. It is a legally binding agreement between owners of a business for the purchase of each other's interests in the business, upon the occurrence of any one of the abovementioned events. The objectives of the Buy-Sell Agreement are to:-

· provide the funds (usually by way of insurance policies) by the continuing owners to buy over the outgoing owner's interest in the business.

· ensure a fair market value of such interest

· ensure ownership and control of the business remain with the continuing owners, and not any outside parties, including the outgoing owner's family

· provide financial security for the spouse or the beneficiaries of the outgoing owner by having ready buyers for his business interest

A trust can be set up to facilitate the execution of a Buy-Sell Agreement. Life insurance policies are taken out by the individual owners of a business to fund the sale and purchase of the respective owners interests in the business according to the terms of such agreement. The policies are then assigned to trustees of a trust for the benefit of the other owners.

The use of the trust ensures that independent trustees are under a legal duty to see that the proceeds of the policies are properly applied for the purpose of paying for the outgoing owner's interest and to ensure that such interest is transferred to the continuing owners. Furthermore, the premiums on the policies can be paid by the trustees, instead of by the individual owners (the insured). The proceeds of such policies will not attract estate duties.