Trusts can be generosity or cruel control

Consider well before setting up a Trust , says John Stirling

On both sides of the Border, trusts are used to carry property safe for a period. Picture: Phil Wilkinson
On both sides of the Border, trusts are used to carry property safe for a period. Picture: Phil Wilkinson

Anthropologists are more interested in similarities between cultures than differences. In what we do the same, one sees the essence of man. When the societies studied are England, Wales and Scotland, it’s a question of taste or purpose whether one dwells on the differences or the similarities.

One of the classic differences between the two legal systems is the law of trust. I glory in both the differences and the coincidences. The differences suggest that originality lives, the coincidences that we are fundamentally alike.

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In England, the law of trust is one of the fundamental building blocks by which justice is sought. In Scotland, that imperative is addressed in other ways, mostly through the law of enrichment. Here, trust is a branch of property law. It’s a comfort and source of pride that both systems have developed overarching equitable doctrines to moderate the effect of linear logic from principle. That is the quality of justice we call mercy. Here I am not concerned with those shared facets expressive in different ways of an ultimate truth, but with a lesser role trusts play in both systems.

On both sides of the Border, trusts are used to carry property safe for a period. That puts it charitably. Some trusts are propagated for caustic reasons; as a means of control, as a monument to the settlor’s success or vanity, because the beneficiary is not trusted. Only rarely are trusts created for unalloyed love. Where they are, the motive is usually asset protection, the protection of the vulnerable, or to control the ultimate destination of assets.

Trusts elongate the process of gift giving. Psychologically, the acceptance of a gift is the acceptance of a reciprocal obligation of some sort, but not all are ready to accept that obligation. The recipient of regular gifts must have a basis to accept them if he or she is not to be diminished by them.

Love is the easiest motivation to accept but, failing that, the beneficiary must at least feel worthy of the gift. More, as the trustee can say no, there is scope for dependency, control and sometimes abuse unless the reasons for delaying the gift are carefully explained.

In most cases, a trust starts as an arranged marriage between beneficiary and trustee. As those so wedded are not saints but human, misunderstandings can develop. Relationships where power is grossly unequal can fall into ugly behavioural patterns unless wisely managed by the trustees. It’s a rare beneficiary who can, in practice, hold his trustees to account but it is a wise trustee who seeks to avoid or manage (where possible) such conflicts.

Of course, awareness of these problems is a large part of a solution to them, but I wonder how often the risks are understood when trusts are contemplated and trustees consider accepting appointment.

Official sentiment has moved against trusts recently but they have a useful place. What is frowned upon is heavily taxed and, occasionally, barred.

Virtually all trusts which are created during life are now discretionary trusts for IHT and subject to a ten-yearly charge. It accrues over time and is charged at no more than 6 per cent of the value of a trust’s assets at the date of charge which exceed the inheritance tax nil rate band, currently £325,000. All trusts created by the same person after 6 June this year will share a single allowance of £325,000. Discretionary trust income is charged to income tax at 45 per cent and donations into trusts are subject to inheritance tax. The net result is that for assets worth more than £325,000 to be put in trust, there must be very good reasons. It’s for settlors to judge whether the tax saving allowed, currently £130,000 for a trust worth £325,000, less the cost of the trust administration, is an acceptable saving.

Living with a trust created for the wrong reasons often leaves scars on beneficiaries, settlors and trustees. It’s vital that those reasons be weighed against the risks. Controlling a beneficiary’s use of property for a period is sometimes not a kindness. One needs to consider whether that cruelty is necessary and what can be done to mitigate it – whether by protections within the trust deed, education of the trustees and beneficiaries, or both. If one has to be cruel one can then still be kind.

• John Stirling is a litigation and dispute resolution partner with Gillespie Macandrew