You want to give someone a gift, let's say its for their birthday. After considering what to get them you grab your electronic device of choice, mine would be my iPhone (other mobile devices are available), and log in to your favourite online retailer "wesellstuff.com". After making your selection you pop in the recipient's address and pay for your gift. Usually, within 24 hours it's delivered to the intended recipient and you get a little notification to say it has arrived.
A normal commonplace transaction and series of events yes? Now, I hope you'll bear with me as I haven't taken leave of my senses (yes I know this is a "tax" blog), but there is a reason for my little story above, and it relates to the use of trusts...
You have trusted "wesellstuff.com" to take your money and send your purchase to the chosen recipient. However, because they're on holiday it got delivered to the neighbour, who then forgot about it. Or, the delivery driver left it behind the bushes by the front door and a passerby decided to help themselves to it. What I'm trying to illustrate is that your intended gift could have ended up in the wrong hands, or have disappeared altogether.
So, let me get back onto the subject of tax planning and the use of trusts. My little story hopefully illustrates why people use trusts. When we're helping clients with inheritance tax planning we're not talking about a £10 book or DVD, we are talking about gifts of tens sometimes hundreds of thousands of pounds. Imagine that ended up in the wrong hands or being lost because of circumstances outside of your control!
Now some will say that I am being sensationalist, but I really am not:
- Let's say you gift £50,000 to your daughter for her and her boyfriend to buy their first house. Like most people, they choose the cheapest option for their legal work and they end up buying it as joint tenants. Tragically your daughter passes away, and because she bought the property with her boyfriend as joint tenants he inherits her half share, which by the way includes your £50,000 gift.
- Alternatively, you make a gift of £50,000 to your son to help him set up his own business. After a couple of years, it turns out not to be the roaring success that he hoped it would and he files for bankruptcy. Again, your £50,000 is gone and there's nothing you can do to get it back.
- Finally, as in my first example, you gift £50,000 to your child (who is married), and within a couple of years they divorce and their ex-spouse takes half of the gift you made as part of the legal settlement.
All of these are very real examples that I have come across in practice that leave the donor (i.e. YOU) with absolutely no control or recourse regarding the gift they made to help their child. I could tell many more involving people going off the rails, developing drink and/or drug problems, suffering from life-changing illnesses. In every single one of these instances, the position could have been very different if the parent in question had made the gift to their child by using a trust because a trust creates a sort of legal limbo between the person making the gift and the one receiving it. The effect of this is to create a situation where your intended beneficiary can have the use and enjoyment of the trust assets, but they do not legally own them in their personal capacity.
I really do wish that our current lawmakers and media would understand why trusts are used. These days they have almost become a byword for tax avoidance and corruption. Anyone with a trust is viewed suspiciously by the collective. Why is this I ask myself, and I can only conclude because it furthers a political narrative. The vast majority of people use trusts to PROTECT not to AVOID!
