Financial Planning

Business Continuity Trusts

Trusts
Trusts are relatively easy to form when compared with company formation. In practice, trusts are formed in writing and the trustee is often a private company. There is usually a clause allowing the settlor to remove the trustee. In this way, the settlor has indirect control over the trust. The trustee is given wide powers to acquire or dispose of property, to carry on business and to borrow money. He is given power to distribute the profits as he pleases to a list of named beneficiaries. This means that, each year, he can vary the profit amount distributed to each beneficiary. This is often useful for tax purposes. The trust deed will contain many other provisions but the above-mentioned are the most important provisions.

It is usual for a trust to trade under the name of the trustee. No mention is made of the trust and the public need not know that they are trading with a trust. If the trustee is a limited company, the trust will appear to be trading as a limited company. It will have the advantage of limited liability. A trust, as such, does not have a separate legal personality like a company has. Consequently, a trust is not taxed as a single entity. The profit of the trust is distributed to the beneficiaries and the beneficiaries pay the tax. It is similar to a partnership in this regard.

Trusts were very popular in the 1970's and early 1980's as tax-saving vehicles. They were mainly used to distribute income to children. However, in recent years, their popularity has waned because of the penalty tax imposed on the unearned income of children. A trust combined with a limited company as trustee will involve high annual administration fees. The disadvantages of trading as a trust are 1) the cost of setting up the trust and ongoing costs of maintaining it, 2) its imprecise nature and also the fact that it is often not fully understood by the operators of the trust. This gives rise to problems. If care is not taken in setting up the trust, an unexpected Capital Gains Tax liability can accrue.

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