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Business Clinic: Is a discretionary trust the right decision for our farm and our family?

Whether you have a legal, tax, insurance, management or land issue, weekly farmersBusiness Clinic experts can help.

Here, attorney Gavin Smith of Thrings advises on the merits of trusts and in particular discretionary trusts.

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Q. We are advised to place farm business assets, including land, commercial and residential properties, in a discretionary trust.

I understand this may protect assets and vulnerable/minor beneficiaries, but would like to know more – can you advise please?

A. Placing assets in trust can be an effective way to protect them during your lifetime and after your death.

Simply put, a trust allows the owner to place legal ownership of their assets in the control of another person or persons – the trustees – for a specific purpose.

This can be beneficial in tax planning, especially with regard to inheritance tax. It can also be advantageous for inheritance purposes.

Types of trusts

A common type is a simple trust, where the beneficiaries are identified when the trust is created.

However, a discretionary trust can give more flexibility, especially when you want to care for people under the age of 18 and/or vulnerable people.

In these cases, a discretionary trust gives trustees the power to decide who – from a defined class of beneficiaries – should benefit, by how much, and when.

This can be a useful way of ensuring that a fiduciary can react to changing circumstances and is particularly appropriate in situations where there may be an unforeseeable future need.

For example, a grandchild who may need more financial assistance than other beneficiaries at some point in their life, or beneficiaries who are not capable or responsible enough to manage the assets themselves.

Deciding whether a trust of this type is suitable requires a full understanding of the assets involved – their values, whether they are owned by the person(s) involved or a business, partnership or corporation and whether they may be eligible for relief inheritance tax.

Discretionary trusts

When setting up a discretionary trust, it is important to ensure that it is carefully structured and it is essential to be clear about your plan for the business, including succession plans.

With a full understanding of the circumstances, your legal advisor will be able to help you decide if a discretionary trust is an appropriate structure.

If so, you should accompany the trust with a letter of wishes (non-binding) to guide your trustees as to how, all things being equal, you envision them exercising their discretion.

For example, how and when trust income should be distributed and to whom; and when distributions of capital, for example of buildings, land or cash made from the sale of assets, may be considered appropriate.

When ceding legal control of your assets to another, you will want to select your trustees carefully.

You will also want to make sure they fully understand their responsibilities and are accountable for their actions.

Your trustees will be required to register the trust and prepare annual accounts and tax returns – although in most cases professional advisers will be appointed to assist them with these tasks.

As with any important business and personal decision, take the time to consider your options and make sure you are well informed of the potential pros and cons.

Entering the process without a full understanding of the implications of setting up a trust and possible alternative structures to realize your vision would present risks that could outweigh the benefits.

However, careful planning and reliable trustees can produce an outcome that secures your assets and the prosperity of your beneficiaries for the next generation and beyond.

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