This blog is about the use of trusts in estate planning and charities. It is uses as a foil the writings of political scientist, Francis Fukuyama. He wrote the 1992 book The End of History and the Last Man. In that book, Fukuyama wrote:-
“What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” (my emphasis)
Ignore the politics, ideology or other aspects to this quote… the underlying message from Fukuyama in 1992 is the reaching of an end point of an evolutionary process to which there will be no more and the past is just that, the past, and there will be no more past or future as we have now arrived at (and will exist in) a particular universal final form.
Could such analysis apply to the use of trusts?
Why do I ask that? Here are three situations where the future of trusts has been questioned.
Trusts no more for charities with the introduction of the Scottish Charitable Incorporated Organisation (“SCIO”)
We have talked on a number of occasions abut charity legal vehicle choices and the apparently unstoppable march of the SCIO. However, caution must always be applied. Informed choice in legal vehicle selection is critical as the ‘right’ choice will not always be a SCIO. As I have said before, “a new form of charitable vehicle is not unwelcome and could provide choice. However, SCIOs are not necessarily a panacea and their use will need careful consideration.” (Third Sector, November 2009)
The limited liability and corporate personality characteristics of a SCIO are often trailed. But for me it is the flexibility of a SCIO that makes it so attractive. It can be made to reflect what your own organisation is to be and the documentation can be flexed to create the governance structure that is right for the particular charity without quirks of trust or company law interfering with that. What must be remembered however is that with little default ‘SCIO law’, the drafting of the constitution becomes particularly important.
It is correct that charitable status is existential to a SCIO. Lose charitable status and you lose the SCIO. However, if the loss of charitable status is a key factor for a (new) charity there are perhaps other issue to be considering! The other point is the assets of a SCIO that is going to have charitable status removed (and therefore its existence) will not ‘vanish’ or be ‘lost’. Those assets, one way or tuther, will be passed to another charity. It is also possible for SCIOs to transfer assets to other charities – the process will be different, but there is no need for a SCIO to transfer assets to another SCIO.
So, a welcome addition, but as ever thought must be applied. If there is a ‘downside’ to a SCIO it is that for some charities it will restrict their ability to borrow (via a floating charge charge’). For most (charities and and lenders) that will not be an issue.
Our view is that the SCIO is probably the right way to proceed for new charities. Similarly, existing unincorporated charities should consider adopting an incorporated legal status and the SCIO is likely to be the right choice for those charities wishing to incorporate. A company might be be preferable in some circumstances.
All in all, the trust has probably had its day as a charitable vehicle and that is probably right when the “pros and cons” of the legal vehicle choices are weighed up.
Trusts no more for estate planning after Finance Act 2006
22 March 2006 was the end of the trust as a tool for significant estate planning. Some will argue that. Overall, that would seem an exaggeration. But it is worth exploring further.
22 March 2006 was Budget day and it set out trust taxation changes that would bring the vast majority of trusts into the discretionary trust ‘relevant property” regime. Most readers will know the full details of that. But broadly it importantly placed a limit on the value that could be transferred to a trust without incurring an immediate inheritance tax charge. No more than the nil rate band (currently £325,000) can be gifted to trust by an individual. So, the end of the days were millions could be transferred to trust without an immediate tax charge.
We are not convinced that it is true that the use of trusts ended that day. For one, the tax focus overlooks fundamental and attractive attributes of trusts: control, trustee discretion, flexibility and often no fixed entitlements for beneficiaries as well as overall asset protection.
For many couples, the ability to gift a combined amount of £650,000 will be sufficient and when taken together with those attractive characteristics, a trust provides a powerful and attractive tool for inheritance tax and family estate planning. For example, in parental assistance for house purchases, trusts can prove very useful to protect family wealth from future relationship-based and other third party claims.
As we will see in more detail in the final section of this blog, for certain death benefits, trusts remain the appropriate ‘house’ and one example is life policies. Life policies may pay out significant amounts. However, while an individual is in good health, a policy is likely to have little value and can be transferred to a trust without incurring the immediate tax charge.
The SCIO has been an example of a legal vehicle being created that attempts to mimic the best elements of other legal forms. A similar thing has happened with trusts. If the use of a trust will cause immediate tax barriers, can we use something else that exists in a different tax regime, but can offer the valuable trust-like characteristics (namely trustee discretion, flexibility and no fixed entitlements for beneficiaries as well as overall asset protection)? So, we now see these elements harnessed through new uses of trusts, partnerships, companies and contracts. While different strategies are being adopted in the post-22 March 2006 tax world, those new strategies show that the characteristics of a trust remain of huge benefit when protecting hard-earned family wealth.
The discussion about trusts in this section has so far been about lifetime trusts where assets are transferred to trust during an individual’s life. Assets can also be placed into trust on death via a will. We see an increasing use of trusts in wills to act as the foundation for family wealth. The valuable characteristics of a trust can be secured, there is no value limit as such on what can be placed into trust and there is greater flexiblility over who can benefit from the trust. This can also be achieved using a deed of variation, although having the trust structure in the will to start is preferable. A will trust can be a particularly effective tool where a family business is involved, complex assets, vulnerable beneficiaries, asset protection as a key objective, a ‘blended family’, disabled persons or to form the basis for estate planning for the next generation. A will trust can be a powerful intergenerational planning vehicle.
Trusts (spousal by-pass) no more after the introduction of new pension death benefit freedoms
For some the new rules mean the traditional strategy of having pension death benefits pass to a trust is old hat. The ‘spousal by-pass trust’ has had its day. So, put them in the bin! Right? Probably wrong. There is no harm in keeping an existing trust in existence. It should never have been the case that the death benefit must pass into the trust and that remains the case. Seeking maximum flexibility, including perhaps the option of a trust, is key. It may be less likely that new trusts for pension death benefits will be set up, but there will still be cases where they can have value. For pre-age 75 deaths, trusts could still be useful. Where asset protection is the overriding objective, trusts will always be important. It can also be possible in some situations to set up a trust post-death to receive pension benefits, if this is desired and the scheme allows. An understanding of the scheme rules and some discussion with the scheme administrator is likely to play a key part in such circumstances.
It must be acknowledged that not all death benefits are related to pensions and governed by the new rules. Death in service benefits through employment will be in many, many cases best held in a trust. We have already mentioned life policies and trusts above. ‘Keyman’ and other business related death benefits might also benefit from the use of a trust.
Fukuyama (in 1992) probably did not quite predict with complete accuracy what would happen in the world as far as a universally accepted final fantasy form is concerned.
Mark Twain (or was it?): “the reports of my death are greatly exaggerated”
Bond: “you only live twice”
The kids: “YOLO” – so, the trust (I believe) is alive… long live the trust (perhaps except for charities and in certain pension death benefits) and all ingenuity connected to its use and its future!
This blog is based on talk given by Alan Eccles at the Royal Faculty of Procurators in Glasgow in March 2017.
On August 21, 2017