Deciding whether or not to set up a family trust is a big decision, so much so that it’s important to get impartial legal advice before doing so. In this article, however, we set out some of the advantages and disadvantages of family trusts to help you make an informed choice.
What is a trust?
The purpose of a family trust is to protect the ownership of your assets. When you set up a trust, you transfer the legal ownership of your assets to the trustees while continuing to use and enjoy them as long as the trust deed permits. And so when your assets are in a family trust, you no longer have legal ownership of them. Instead the assets are owned by the trustees, for the benefit of family members.
Advantages of a family trusts
There are a range of situations in which you may want to consider setting up a trust and these include the following:
Protection from creditors: assets held in a trust are usually protected from creditors of the beneficiaries or the trustees personally. And so often the motivation for setting up a trust is to protect the family home in the event of a failed business venture.
Protection against relationship property claims: trusts are sometimes set up to ensure that an inheritance goes to your children rather than their partners. In addition, a trust can help manage the risk of unwanted claims on your estate when you die – from former partners for example.
Providing money for special purposes: setting up a trust can also be used to generate extra money for special purposes such as a child’s education.
Disadvantages of a family trust
It’s essential to remember that there are some disadvantages with a family trust.
Loss of ownership: perhaps the most important disadvantage is the loss of ownership involved. The fact is that when you set up a trust you will no longer directly own the assets involved, although you may still be able to enjoy them.
Set up costs: there are costs involved in setting up a trust, just how much depends on the complexity of your trust and the nature of the assets you’re transferring.
Ongoing costs and paperwork: as well as the initial set up costs, there will be ongoing legal and accounting fees involved. What’s more, you will need to allow for the time and costs involved in meeting annual accounting and administrative requirements as well.
Is a family trust right for me?
There’s no doubt that in some cases a family trust can provide an immediate benefit especially in relation to protection from relationship breakdowns within the family, or unwanted claims from business creditors. However, before making your final decision, it’s essential that you consult a lawyer for expert advice on whether a family trust is the right thing for your specific situation.