They allow for the management of assets with the intention of protecting those assets and preserving them for selected beneficiaries. Trusts involve formal agreements, with listed rights and duties for the trustor, trustee, and beneficiary. There are different types of trust, the two most common being the inter vivos trust and the trust mortis causa or testamentary trust
The inter vivos trust is formed and registered whilst the head or owner of the family business is still alive as opposed to the testamentary trust that is created in terms of the individual’s will after they have passed away. A trust is created by a deed. The deed sets out the governance and operation of the trust, and the powers of the trustee
Trusts, assets, and taxes
Every deed, like every person, is different. The deed lays down the rights and duties among the parties of a trust – the trustor (who transfers assets to the trust), the trustee (who manages the trust’s assets), and the beneficiary (for whom the assets are held within the trust). The assets within the trust are referred to as the ‘trust fund’.
A trust can have many purposes, including splitting income between members, reducing certain duties and taxes, protecting business assets from creditors, and ensuring succession plans are carried out as planned. While a trust offers many benefits, it also comes with disadvantages. One of the drawbacks is that a trust can be heavily taxed when assets such as land are transferred.
Unlike the sale of a business to a third party, transfer of ownership may not generate money but it could still result in stamp duties and/or capital gains tax.
Family business trusts and divorce
A trust can be a very useful tool should a family business owner face divorce. It’s possible for a business owner to place significant assets or their business in a separate trust that exists outside of the marriage before they get married. As a result, if they were ever to divorce, a trust like this could remove the issue of separate property and its appreciation.
This is because, once a trust has been established, the trust, and not the individual owner, would legally own the separate property, including the business. Therefore, the future ex-spouse, even if they were once a trustee, would have no claim on the trust’s assets, and therefore on the business.
A word of caution
The rules governing trusts in this regard can differ from country to country and in terms of business type, so careful drafting of a trust’s terms and conditions is necessary to protect funds from unintended beneficiaries, such as an ex-spouse seeking maintenance payment. Trusts are highly complex legal vehicles and there are many factors to consider, especially when family is involved as this tends to bring emotional issues to the fore
Before forming a trust, it’s important to have a clear goal in mind and to seek professional legal and financial advice as there are a number of tax and legal implications associated with trusts. Important questions include:
- Who will act as trustee?
- What assets will be transferred into the trust fund?
- Who will be the beneficiaries, and how will their needs be met?
- Will the trust come into effect before or after death?
- How long will the trust operate?
If you have more questions about forming a trust for your family or business, ask them in the comments below…