Is it time to wind up the family trust?

Introduction

Despite increasing enquiries from clients as to whether trusts still work, the short answer is “yes”, but what are the reasons to keep one?

You may have established your trust to protect assets against potential claims by creditors or to provide on-going financial support to a disadvantaged family member?  Another reason may have been to minimise your personal assets so that you could increase the possibility of receiving a residential care subsidy in the future?  Whatever the reason, it may no longer be relevant due to changes in the law, as well as changes in your individual circumstances.

Reasons to keep a trust

Trusts are still very much a relevant tool used to protect assets from unwanted claims.  Despite changes to the law over the years there are still many benefits in keeping a family trust and/or establishing a family trust.  Some of these reasons are as follows:

• Protection of assets against claims from creditors – for example, to protect the family home from the potential failure of a business venture;
• To help to save or to set aside money for specific purposes, such as a child or grandchild’s education;
• To manage the finances of a family member who may not be able to do so themselves (perhaps due to health issues);
• To ensure your children (and not their partners) are protected in relationship property disputes and to keep separate any property that they are inheriting;
• Protecting children that either have been, or are at risk of being, declared bankrupt.  This will allow the trustees to delay distribution of that child’s share until after the child is discharged from bankruptcy;
• Securing “testamentary freedom”.  Although wills are important, a will-maker has no ultimate control over his/her estate (no matter how carefully the will is drafted) due to the provisions of the Property (Relationships) Act 1976 that apply to wills and also the Family Protection Act 1955.

A change in personal circumstances may diminish the need for a family trust and the on-going maintenance it requires may seem like an unnecessary expense.  However, winding up your trust may expose your assets to risk and the protection gained from establishing the trust in the first place may be lost. 

Some risks and responsibilities associated with trusts

There are numerous responsibilities associated with establishing and maintaining a family trust, in particular if you remain as a trustee, such as meeting regularly with the other trustees, keeping minutes and general trust administration.

If a trust is not set up correctly or for a legitimate purpose there is a risk that a trust may be declared a sham and potentially “busted open” by the courts.  At the very least it will be more susceptible to unwanted claims.  A trust may be declared a sham when the settlor retains too much control over the trust property.  This is because the purpose of creating the trust is to vest ownership of property in the trustees. 

Additionally, a trust will not necessarily protect against claims under the Property (Relationships) Act 1976.  Property that is disposed of into a trust during the relationship or in contemplation of the relationship will still be considered “relationship property” under the Property (Relationships) Act 1976.  That property will then be subject to the equal sharing rule.  The court has additional power under the Property (Relationships) Act 1976 to look past a trust if the effect of the dispositions is to defeat the rights of one of the parties under the Act.

Winding up a trust

When trusts are wound up, the general drivers seem to be that the trust is no longer required as administration costs are too high relative to the recognised benefits, and more recently the anticipated residential care subsidy is not available and so a “trust reversal” is being undertaken before a new application is made.  Other reasons a trust may no longer be useful are as follows:

• There are no longer tax advantages that were prevalent at the time when the trust tax rate was lower than the highest personal tax rate;
• The purposes of setting up a trust in the first place was creditor protection and the apparent risk no longer exists;
• Settlors/trustees are emigrating and there is concern about double taxation.

These are just some examples of ways in which life and the law can change and in doing so, mean that a trust is not as useful as it once was.  However, the costs involved in winding up a trust can be significant and will depend on what is required based on individual circumstances.  There may also be tax implications for winding up the trust.

Whatever the reason for keeping a trust or alternatively winding up the trust, it is important to keep asset protection arrangements under review and update these arrangements for fairness, the passage of time and important events in one’s life, such as marriage, having children, and getting divorced (just to name a few!).  Reviewing asset protection arrangements regularly will ensure that a trust remains fit for its purpose, whatever that purpose may be.

If you would like further information please contact Phil Harris on 07 958 7425.