While it’s not something that is necessarily on your day-to-day radar, it is important to be mindful of protecting and managing your assets, whether they be your prized possessions, a home or a business built with years of blood, sweat and tears. An important part of ensuring your financial well-being, and those of your children, partner and other dependents, is planning your estate properly. While ultimately that comes down to making sure that you have a will that properly caters for what happens to your assets (and your dependents) if something happens to you, it’s also about digging a little deeper and making sure that your estate planning is properly tailored to your situation. It is particularly worth considering whether there is a role for a trust to play in your estate planning?
Testamentary vs. Inter vivos trusts; what’s the deal?
A testamentary trusts is what it sounds like – a trust created in your will, more formally known as your “Last Will and Testament”. It comes into effect when you die and is a good way to leave money or assets to beneficiaries in a structured way that allows family, friends and professionals to act as trustees, and administer the assets for the benefit of your beneficiaries, often children under 18.
Testamentary Trusts like this are often structured to terminate when the beneficiary or beneficiaries reach a certain age (18, 21 or 30, being common examples) and to transfer the assets contained in the trust to the beneficiary directly. Other testamentary trusts are set up to be longer-lived entities – they can be set up to last to benefit future generations of the family, rather than only protecting assets for a few years.
An inter vivos trusts is created and established while you are still alive by a legal agreement between you and a trustee or trustees – who, again, can be friends, family members, professionals or some combination of these. Inter vivos trusts can be set up as vesting or discretionary trusts.
If it is a vesting trust, it means that at an appointed time, the trust will vest and then the named beneficiaries will have a right to receive certain benefits from the trust, with trustees managing the trust’s assets in the time between the trust’s founding and its vesting. Inter vivos trusts in particular are flexible and useful entities. They are not only useful in estate planning, but they also provide a shield against potential financial risk.
Say you’re a business owner trading from a company or as a sole proprietor – inter vivos trusts can help protect your assets from creditors of your business, or even help keep those cherished heirlooms safe from being exposed to financial risks. In the business world, inter vivos trusts can be useful as holders of commercial property, which allows you to distribute profits to your family or support your dependents while keeping your assets safe from creditors who may be owed money by your business.
A discretionary trust means that the trustees can use their discretion as to how benefits arising from the trust are distributed to its beneficiaries. Something useful that you may not know about is the conduit principle. With discretionary trusts, trustees can send income and capital gains directly to beneficiaries, which could mean some nice tax benefits.
The perks of trusts
When set up and managed right, trusts can be like fortresses protecting your wealth. If life throws a curveball – like business troubles, financial setbacks or even a sticky divorce – the assets held in trusts are legally separated, keeping them safe from your personal creditors.
Plus, if you’ve got beneficiaries who might not be the best at handling finances, trusts can step in with trustees acting as financial guardians to help manage assets and ensure your loved ones are well taken care of.
And let’s not forget about taxes – trusts can be your strategic partner in tax planning. Teaming up with tax experts can potentially help you slash estate duties, income tax, capital gains tax and more. However, the usual caution applies here – for trusts to be efficient and effective, they need to be set up properly and carefully looked after.
That’s where legal and accounting experts come in. They will guide you through the process of choosing a structure that works for you and then setting up, managing, staying compliant and making the most of trusts. Whether you’re a budding entrepreneur or want to make sure your family’s future is rock solid, trusts could be your ally in protecting your financial future.
Author: Katherine Timoney, Senior Associate – Commercial Law and Litigation