Creating a trust or family investment company

Trusts and family investment companies can potentially be beneficial for Inheritance Tax planning, asset protection and wealth accumulation.

We have extensive experience in setting up and managing a wide range of trusts including:

• Discretionary trusts
• Life interest trusts
• Bare trusts
• Charitable trusts
• Insurance trusts
• Personal injury trusts
• Will trusts.

A Family Investment Company (FIC) is a bespoke private company, which can be used as a tax-efficient alternative to family trusts. A FIC is a flexible structure, allowing families to define how specific family members benefit through varying rights attaching to shares, or the number of shares in issue. The directors and shareholders of the FIC are normally family members. As with trusts, the structure of the FIC can enable parents/grandparents to retain control over assets, whilst accumulating wealth in a tax-efficient environment and facilitating future succession planning. It is preferable to set up FICs with cash (usually by loan), as the transfer of property or shares could create capital gains tax and stamp duty liabilities.

We also have an expert Trust & Tax Management team, who can assist with everything related to managing trusts.

How can Family Investment Companies (FICs) help reduce Inheritance Tax?

A FIC can help families manage their exposure to Inheritance Tax (IHT) in several ways. The key features and benefits of a FIC are as follows:

• When the FIC is formed, shares can be given to family members without incurring any immediate tax charges and, after seven years, the full value of what has been given away will pass out of the estate of the founders, so avoiding any IHT
• If the founders lend initial capital to the FIC, any growth in the value of investments held by the FIC will be outside the founders’ estates
• The founders can create distinct classes of shares, so enabling them to decide which of those share classes (including those retained by the founders) receive the dividend income declared by the company (and the capital if the company is ever wound up)
• If shareholders have a minority interest in the FIC, the value of their shareholding will be discounted on death for IHT purposes, taking into account the size of their holding and their inability to sell the shares or demand income from the company
• Unlike trusts, the FIC will not pay periodic charges to IHT which apply to trusts at up to 6% every ten years, or exit charges if and when capital is distributed although there are other tax charges that may apply
• A FIC may provide useful protection in the event of a shareholder’s divorce. The FIC can be structured so that shares can only be held by direct family members (excluding spouses).

What is the difference between a trust and a family investment company (FIC)?

Trusts and FICs are alternative structures for holding family wealth and both can be used for IHT and estate planning purposes. Usually, FICs are set up with cash rather than specific investments to avoid tax charges arising at the point the assets are transferred into the FIC, whereas trusts can potentially receive a much wider range of assets when they are set up. Both trusts and FICs are subject to their own tax regimes and careful thought needs to be given in terms of which would be the appropriate structure in any given set of circumstances.

How can trusts help to reduce Inheritance Tax (IHT)?

Placing assets in a trust can mean they are no longer considered part of your estate when it comes to IHT. If you create a trust by a variation within two years of an inheritance received after someone’s death, you can potentially still control the assets and receive an income from them without the assets forming part of your estate on your death. Trusts are also a good option if you want to give away money or assets to family members, but would still like to retain some control.

Using deeds of variation to redirect an inheritance is an under-used but very effective way to reduce future IHT if your estate is likely to be subject to IHT.

Nominating a trust to receive death-in-service benefits from an employer or placing life insurance policies into trust can avoid inflating a spouse, civil partner or partner’s estate for IHT purposes, but the funds remain fully available to them should they be needed.

What are the different types of trust?

There are a number of different types of trusts that can be created either during your lifetime or on your death, and the key types are as follows:

• Discretionary trusts are where the trustees hold the trust assets at their discretion, so that the beneficiaries named in the trust do not have any specific rights to either the capital or income. These sorts of trusts are often used for estate protection purposes as a result
• Life interest trusts are where one or more beneficiaries have a right to receive the income generated by the trust, but do not have any rights to the trust assets themselves
• Bare trusts are where the underlying beneficiaries are absolutely entitled to the assets held within the trust, and the trustees act as the legal owners of the assets, usually until the beneficiaries reach the age of 18, but they continue beyond then in some circumstances
• Charitable trusts are run exclusively for charitable purposes
• Pilot trusts are usually set up on a discretionary basis but with no assets in them at the outset so that they can later receive payments from life policies, death in-service benefits and other similar benefits, usually on death
• Personal injury trusts are designed to hold the damages that arise from personal injury claims, and the trustees will then manage and invest those funds on behalf of the beneficiary to whom the damages were awarded
• Vulnerable person’s trusts are created to hold assets for individuals who are treated as being “vulnerable” within the legal definition, and are designed to manage those assets for the vulnerable beneficiary
• A ‘will trust’ is a generic term relating to any trust that is created in a will when someone dies, and the type of trust or trusts involved can be one or more of the varieties referred to above.

All these trusts have tax and other considerations on creation and during the lifetime of the trust. Before creating any kind of trust, it is essential to take advice on the type of trust involved and the tax and other implications of the trust being created.

What are the benefits of setting up a trust?

Setting up a trust can have a variety of different benefits. Many trusts are created through wills and come into effect when the person who has made the will dies. These sorts of trusts are typically designed either to mitigate Inheritance Tax (IHT) (usually because the person owned business or agricultural assets to which certain inheritance tax reliefs apply) or to protect the deceased person’s estate for the benefit of their children or other nominated beneficiaries. A trust will keep the assets out of the estate of those beneficiaries, which can be useful as a way of guarding against a beneficiary divorcing, going bankrupt, experiencing other financial difficulties, exceeding asset limits for care funding purposes or for longer term IHT planning.

Lifetime trusts can also be set up to mitigate IHT, especially where life policy proceeds or death in-service benefits are added to those trusts. Alternatively, it is possible to create a trust and then to transfer assets into it to take advantage of the lifetime gifting rules. This usually means that the donor of the gift needs to survive seven years in order for the gift to fall out of account for IHT purposes. Creating a lifetime trust can give rise to a tax liability under some circumstances so it is a good idea to take advice first.

Can a trust protect assets in the event of divorce?

Many parents are concerned about the possibility of their children divorcing and whether this would allow their child’s former spouse to make a claim against assets inherited from the parents’ estates. If the parents create wills leaving their estate in trust on their deaths, this can help to protect their estates. The trust means that the inheritance does not belong to the child outright and is therefore much better protected in the event of a divorce. At some later point, the trust can be wound up and the assets distributed to the child when it is safe to do so.

We have one of the largest and most experienced teams of will, estate and tax planning lawyers in Kent and the South East, which has been trusted by generations of families. We work with you to protect your assets and pass on your wealth to the next generation in the way that best suits your circumstances.

Our estate and tax planning lawyers have extensive experience of supporting high and ultra-high net worth individuals and families with complex asset structures and international elements. We can help you to plan for the future and minimise your tax liabilities, for example through the use of trusts and other appropriate structures.

Working with us, you will benefit from the support and collective experience of the whole firm. We offer a strong network of lawyers to provide a comprehensive service, including probate, trust management, tax compliance, family law, The Court of Protection and buying or selling a home.