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Trusts can offer a range of benefits and flexibility for your family or business. This is especially when you have assets that you are looking to protect. You also may wish to distribute your assets to other people or family members. This article sets out three reasons you might need a trust, such as:

  • where you have shares and other property to protect;
  • to take advantage of possible tax efficiencies; and
  • securing income for your family into the future. 

1. Protecting Your Shares and Other Property

One of the most common reasons to set up a trust is to protect your assets from creditors and relationship property claims. Assets can include shares in a company and other personal property. After you set up a trust with your assets designated as the trust’s assets, you are no longer the legal owner of those assets. Your chosen trustees gain control of those assets and hold the assets on behalf of the beneficiaries

Those shares and other assets, now trust assets, are usually out of reach of creditors. This is beneficial if your business (or yourself) gets into financial difficulty or declares bankruptcy. For this reason, it is common for founders to hold shares in their family trust rather than their personal name. Legally and practically, there is a separation between your personal assets and any assets the trust holds. Therefore, trust assets are usually better protected against creditors and cannot be drawn from to pay back personal debt.

2. Possible Tax Efficiencies 

There are also possible tax efficiencies from holding a trust, depending on your personal and family situation. Many businesspeople find trusts to be useful as a way to carry out tax planning. For example, distributing income among the trust’s beneficiaries on lower marginal tax rates can reduce the effective tax rate on a trust. This reduces the tax rate compared to taxing the entire amount through an individual with the highest marginal tax rate. 

It is a good idea to seek specialised legal and financial advice when considering a trust to explore tax efficiencies. This is mainly because these benefits will differ depending on your individual circumstances.

3. Secure Income for Your Family Into the Future

You can use a family trust to secure income or assets for family members for the future. The key feature of a family trust is, namely, that you create it with the intent of benefiting the family. Family trusts typically work by a family member putting their assets into a trust and setting other family members as beneficiaries. Those family members can then gain income or other forms of payment from the assets in the trust.

There are some common circumstances where a family trust is a useful way of structuring your finances.

For instance, you may wish to start a business with other family members, such as your partner. Consequently, putting your assets into a trust can protect it from claims from creditors if your business venture does not work as well as you would have intended. Another common reason for a family trust is for a parent to guarantee assets or a source of income for their children.

Key Takeaways

There are various reasons why it is a good idea to set up a trust to manage your assets. These include when you have shares or other property you would like to protect, particularly from the risk of a business’s failure and creditors’ claims. Other common reasons to use trusts include exploring tax efficiencies and securing income or other assets for your family. When considering a trust, it is always important to get specialised legal advice about your individual situation and circumstances.

If you want to know more about trusts, whether for your family or business, or more reasons why a trust is beneficial, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Why hold company shares in a trust?

You do not legally hold company shares in a trust. This means that those shares are better protected against creditors.

What is the benefit of a family trust?

A family trust is useful to protect a family’s assets from being put at risk due to debts or liabilities in the future. Family trusts also help set up the distribution of assets to younger family members into the future.

What are the disadvantages of a family trust?

One disadvantage is the initial cost of setting up a family trust, plus the additional legal costs you will need to pay. When placing assets into a trust, those assets become trust assets. Hence, you lose control of those assets, including personal property or shares in a company.

Do trusts mean you pay less tax?

Not necessarily. There is no guarantee that a trust structure will result in tax savings. We suggest you seek specialist tax and legal advice to determine whether a trust is appropriate for you. 

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