Do we need to set up a family trust?
What is a family trust?
A trust exists when one person (a “trustee”) possesses and owns property for the benefit of another person (a “beneficiary”). A family trust is a trust set up to benefit members of your family.
The objective of the family trust is to gradually transfer your assets to the trust, so that legally you own no assets yourself, but through the trust to still have some control over, and get the benefit of, these assets.
You may set up a family trust while you are alive (by a trust deed) or when you die (by the terms of your will). Theseinstructions are given mainly regarding trusts created while you are alive, and with the benefits that these trusts can provide for you in your lifetime.
You may wish to set up a Family Trust with a Trust Deed designed for an individual or a Trust Deed designed for a couple.
What are the key elements of a family trust?
Asall types of trust, a family trust shall have the following elements:
The settlor is the person who sets up the trust, and is usually also the person who currently possesses the assets that will be transferred to the trust. There may be more than one settlor: in the case of a family trust, a married couple may both be settlors.
The trustees are the people who are responsible for administering the trust and they must make sure that the wishes of the settlor (as set out in the trust deed) are carried out. Usually, an independent trustee is appointed by the settlor, often his lawyer or accountant.
The beneficiaries are the people who may benefit under the trust and they usual are all member of your family (including possible future family members such as future grandchildren). These beneficiaries are “discretionary” beneficiaries and they have no right to receive any benefit under the trust; instead, the trustees have a power to choose which of these beneficiaries will receive the benefit of any assets.
The trust deed is the legal document that states the settlor’s wishes and sets up the trust. It appoints the trustees and states their powers and duties, states the beneficiaries, and states various rules for the administration and management of the trust.
The trust’s assets – The trust must have some assets. The eventual aim is for the trust to hold all your significant assets.
The aim of a family trust?
The aim of a family trust is to transfer your significant assets from personal ownership to ownership by the trust.In this way, you protect your assets from various threats, such as claims by creditors, ex-spouses, or partners.
By what age should I have transferred my assets to a trust?
At the latest by age 55 in order to get the maximum benefit from your trust. Therefore, people are advised to consider the advantages of a family trust in their forties and fifties.
But even if you do not transfer your assets to a trust by age 55, a trust can still provide you with benefits.
The costs of maintaining a trust ?
Maintaining a trust has certain costs and overheads. There are annual accounts and annual tax returns to be held and you should comply with all requirements provided by the Aura Tax Authorities. So, it is significant you are fully aware and you can afford the costs.
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What assets can or should be transferred to the trust?
Almost any assets can be held by the trust, such as real estate, motor vehicles, valuable artwork, household items, and company shares. You shall receive advise on what assets should be transferred to the trust.
The steps for transferring your assets to a family trust ?
Once the trust has been formed, the steps involved in transferring assets to the trust are the following:
Select the assets to be transferred to the trust –usually it is the family home. You may also transfer holiday homes, boats, vehicles or paintings – indeed any assets that you personally possess.
Get valid and acceptable valuations for that asset – Usually you will need to get a market value for the house or other asset. The values should ideally be fixed by an independent valuation – and by independent expert valuation of government and other registered stocks and debentures.
Transfer the ownership of the assets in exchange for a debt – Typically you would make an Agreement for Sale and Purchase of the house or other assets to the trust.
Forgive the debt –After the above, the asset has passed to the trust, but the trust owes you a debt for an equivalent amount. A debt owed to you by the trust is still a personal asset of yours, so you have not yet succeeded in divesting yourself of significant assets. The solution is to forgive the debt to the trust. This is achieved in stages over several years, by a “gifting programme”, so as not to incur duty on the forgiveness of the debt. The process of forgiving the debtis necessary to be made.Once the debt has been fully forgiven, you have achieved “personal poverty” in relation to that house or other asset. You no longer own it – the trust now owns it. But you can still receive a benefit from it as a beneficiary under the trust.
Why create a Family Trust?
A Trust is a relationship which is recognised by the Courts, and the details of the Trust are contained in a formal Trust Deed which acts rather like your family legacy rule book.
Creating the Trust has the advantages of being able to satisfy most of the reasons why you might wish to dispose of your property, namely:
Formally recognising financial contributions of other family members that they may have made directly or indirectly to the property.
Avoiding problems following your death by recognising during your lifetime any potential issues that might arise.
Once the Trust is created the Trust Deed will specify where the property is to go on your death.
Once in the Family Trust, the property can be sold quicker following your death as no Grant of Probate will be required.
The burden of owning property will be passed to the Trustees as they can meet both the financial and psychological burdens of owning property should you wish them to do so.
By creating the Trust you can rest assured that you can remain in the property as long as you wish.
Even if the property is sold, you can remain entitled to the income from the sale proceeds and use it to supplement your income should you need to live elsewhere.
What are the possible disadvantages of a Family Trust?
Once created, the property has to be transferred into the names of the Trustees. Whilst your right to remain in the property will be protected, you will no longer have legal ownership of the property and the Trustees will have certain discretionary powers which they can exercise in respect of the property.
Should you need to use the capital in the property to support a loan such as an equity release scheme, then once the property is in the Trust, the number of potential lenders that will deal with a trust will be restricted.
Parties to the Trust ?
Settlor – The person who creates the Trust
Trustee – The person or persons responsible for the management of the Trust
Beneficiary – The recipients of the wishes set by the Settlor
Capital – These are the assets included within the Trust. The maximum that can be placed into the trust is anything up to the Nil Rate Band. This is currently £325,000 for individuals and £650,000 for married couples.
Your Trustees will need to keep records of all receipts and payments relating to the Trust which is important for tax and other purposes. Once the property is placed into the Trust, then the buildings insurance of the property must also be transferred to the Trustees. Contents cover, however should remain in your own name.
Choice of Trustees
You will need to give careful thought to your choice of Trustees. A minimum of two and maximum of four people should be chosen, especially if you wish to place property or land into your trust. Whilst the Trustees must act in accordance with the Trust Deed, they also have certain discretions.
You can also choose to make the Trustees act by majority or unanimously; although care needs to be given if you wish them to act unanimously, as if one Trustee disagrees then no decision can be made. You may wish to use some of the beneficiaries of the Trust as Trustees, but you should be aware that sometimes this can create a conflict of interest. For example, if they are to receive the property upon you vacating the house, perhaps to move into residential accommodation, then they may actively seek to encourage you to take this course of action earlier than you may actually require.
One option is to you choose completely independent Trustees who have no interest in the Trust property. If you require assistance, we can provide details of professional Trustees.
The Trustees’ Responsibilities
The Trustees do not have any power to go beyond the terms of the Trust Deed. However, most things which a person would want to do with his own money or property can be done by the Trustees provided it is for the benefit of the beneficiaries.
The Trustees must:
Disclose any circumstances where they might have a conflict of interest with one or more ofthe beneficiaries. For instance, if a beneficiary owes the Trustee money, then this should be disclosed.
Not act in conflict with the interest of any of the beneficiaries or profit from their role as a Trustee.
Ensure that they know exactly what the terms of the Trust are, and that the terms of the Trust are fulfilled.
Ensure that they do not exceed the terms of the Trust or their powers granted in the Trust Deed.
Ensure that good Trust records and accounts are kept and account to the Inland Revenue for any tax due.
Take independent financial advice at appropriate times and ensure that the advice taken is in accordance with the Trustee Act 2000.
Act impartially and fairly between all the beneficiaries.
Take reasonable care in exercising their powers. It is worthwhile noting that Professional Trustees have a higher standard of care to meet than individual Trustees.
Act jointly. As Trustees are jointly liable for any mistakes, it follows that they should therefore act together and not delegates tasks to each other.
Not charge fees. Only Professional Trustees can claim the payment for acting on behalf of the Trust. Lay Trustees may only claim out of pocket expenses.
Ensure that the beneficiaries of the Trust are kept fully informed. This helps avoid disputes.
It is advisable that the trustees have an annual meeting to review the trust. This can simply be minutes of a discussion between the trustees and is simply to ensure that the trustees comply with their responsibility.
The terms of the Trust Deed
With the trust in your Family Legacy plan, it is usually the home or the assets of the person creating the Trust which forms the asset of the Trust. The property generally remains in the Trust for the duration of the life or lives of the persons that have created the Trust (or until the Trustees, for some good reason consider otherwise).
During your lifetime, you can remain living in your home as you do now or receive an income from the assets placed into trust. However, the home can be sold if you need to move with the sale proceeds being reinvested into another property for you. Alternatively, the sale proceeds can be invested to generate an income for you if necessary.
However, you should be aware that having property in a Trust is not the same as having it in your own name, and you cannot go ahead and sell the property under your own name.
Changes to the Trust
Once the Trust has been set up, changes can be made at a later date in terms of the appointment and removal of Trustees and Beneficiaries. The settler has the power to appoint and remove Beneficiaries and Trustees during their lifetime and within the term of the Trust, at no additional cost. Trustees and Beneficiaries also have the power to appoint and remove Trustees following the death of the Settlor(s), provided that they unanimously agree to the appointment/ removal.
Can the trust be terminated?
The simple answer is yes, if all the beneficiaries agree then they can instruct the trustees to close the trust. However, this cannot be done if a beneficiary is a minor or lacks the capacity to agree; also, a trust cannot be closed if you have retained a right to live in the property or receive income, so you will always be protected.
Whilst you remain in the property, tax should not have a great impact. According to Aura whilst there is no income being generated by the Trust or a capital gain has been made by the trust selling assets, there is no need to register the trust and a yearly tax return will not be issued by the Tax Office. However, if the value of your assets reach 80% of your Nil Rate Band it is advisable to register with Aura.
Provided that the value of your home is below the current nil rate band threshold (for 2013/2014 – £325,000 or £650,000 for a married couple), inheritance tax is neither saved nor increased by transferring your home into a Family Trust. If, however, your home is valued close to or over the nil rate band threshold, then you will need to tell us and we will explain to you the inheritance tax consequences of creating the Trust.
Capital gains tax
Because the principle private residence exemption to capital gains tax applies, when you transfer the property into the Trust, then there will be no capital gains tax charges. However, if you cease to live in the property for a length of time and then it is sold, there may be a capital gains tax charge. This is exactly the same as if you owned the property outright in your own name. If there are other assets also held in the Trust (other than cash), then the current capital gains tax rate will apply to any gains made on those assets. However, your own capitals gains tax annual exemption can be used to offset any Trust gain.
Income tax , Stamp duty land tax and Pre-owned asset tax
Whilst you live in the property, you will not pay a rent for the right to reside in the property and therefore there is no income tax charge. If however, it is rented out at a later date or the sale proceeds generate an income, then income tax will be payable at the lower or basic rate of tax depending on the asset type.
Stamp duty land tax
Generally there is no tax to pay on founding the Family Trust. Stamp duty land tax may arise if the property is sold and an alternative property is purchased by the Trust for you to live in. However, this is the same as if the property was in your own name.
Pre-owned asset tax
This does not apply where you have an interest under a Family Trust; it only applies in special circumstances, usually involving more complex inheritance tax planning schemes.
Reducing the cost of long term care fees
One of the possible benefits of transferring the family home into a Family Trust may be avoiding the need to sell the property for residential care or nursing home care charges, thus securing the family’s inheritance. However, we cannot give you any guarantee that this will be successful, as there is no fool-proof way of avoiding the value of the property being taken into account in means testing. There are antiavoidance measures contained in the law to enable some gifts or disposals of property to be ignored by the authorities and even possibly set aside by the Court. If it is your intention to place assets to avoid care fees, then this simply won’t work. However, there are lots of valid reasons for placing your assets into trust and you should consider your circumstances fully to see if they are applicable.
Do we need to open a bank account?
This will depend on whether the assets in your trust are based on cash, or involve the payment of sums. If the trustees decide to sell the assets then a bank account will be required. A bank account will need to be opened by the trustees in the name of the trust.
How Do Beneficiaries obtain the Benefit?
Normally, a beneficiary can receive the benefit based on several things:
Whether the trustees have full discretion to deal with the beneficiaries
Whether obtaining the benefit is under a special condition ( such as for educational purposes)
Whether it is specific to a rule in your trust ( e.g. beneficiary has reached the age of 25)
It will be possible within your trust for a beneficiary to ask for a loan as the trustees will have the power to lend.
The Beneficiary would apply to the trustees, who would then deal with the request from the beneficiary and make payment, or refuse it dependent on the request.
It is advisable that any agreement to make payment to a beneficiary, or any refusal to a beneficiary, is recorded by the trustees, with each trustee signing the document.
Does your family trust need financial statements?
Does your family trust need financial statements? In a word: yes.
For several more words why your trust needs financial statements, read on
If any trust earns an income, including a family trust, the IRD expects you to prepare financial statements and file tax returns. If the IRD expects you to do something, you really should do it.
To meet these expectations, good record keeping is essential. This will help your trust prepare accurate financial statements. From these, your tax returns can be compiled and all trustees can stay on top of their taxation responsibilities. One of the most important things to include is bank statements which provide evidence of all transactions the trust has engaged in.
What if your trust does not produce an income?
What if it is simply holding a passive asset e.g. the family home? Our advice is to have financial statements prepared anyway. I can hear you from here: “Of course he’d say that. He’s an accountant!” But hear me out. There are many benefits to preparing financial statements for your trust regardless of income. They will give you an overview of a long list of things, including:
- Advances made by settlors to the trust
- Loans made by the trust
- The gifting position
- Assets held
- Liabilities incurred
It’s also important to note that financial statements also help you satisfy your duty when accounting to the trust’s beneficiaries. This alone is a good reason to have statements prepared regardless of the situation.
To be blunt, trust management in Thailand could be better. Much of this comes down to total ignorance of the state of play. Prepared financial statements could help trustees get up to speed and avoid issues. They’ll highlight how much protection your asset-protecting trust is actually providing.
In short, whether your trust generates an income or not, we think you need prepared financial statements. And, under proposed new laws relating to trusts in Thailand, that need will be even greater because your management responsibilities will increase. We’re happy to further discuss the need for prepared financial statements should you ever feel the need to chat.
What are the benefits of a family trust?
A primary reason for setting up a family trust is asset protection. This means any assets sitting inside a family trust is not personally owned by you, and therefore out of reach from creditors. Thus a common structure for small business owners to set up.
Flexibility in decision making as to how to share the burden of tax amongst family members and the control in who to, and when to distribute income are other strong reasons for a family trust set up.
A family trust is not just for the wealthy but it’s a practical vehicle to protect family and business assets.
As you distribute the income amongst family members, you can distribute income to members to make it as tax-effective as possible.
A family trust structure is an additional source of income for retirement which sits outside of super rules and limits.
Set funds aside
It can hold funds for special causes for your children such as monies set aside for education or to ensure funds are held in trust for a child until they are responsible enough to manage their own finances.
It protects assets from unwanted claims made against the estate from former partners when you pass away, and your children or beneficiaries inheritances are safeguarded.
So, before you set up a family trust ensure you are aware of all the reasons why it is the right thing for you and for your family. Be confident of, and understand what you are doing especially the pitfalls or the costs associated with setting up and managing a family trust.
If the positives outweigh the negatives for you then consult a financial planner to dot the ‘i’s and cross the t’s with you, and if need be they can refer you to an estate planning specialist for specific estate planning needs.