As a small business owner, protecting your business assets, ensuring the financial security of your family, and planning for the future are all critical aspects of managing your personal and professional affairs. One of the most flexible and effective tools available for estate planning and asset protection is a discretionary trust. This legal structure allows you to safeguard your business and personal wealth while providing flexibility in how your assets are distributed to your beneficiaries.
At Blackstone Solicitors, we provide expert legal advice to business owners across England and Wales, helping them navigate the complexities of setting up discretionary trusts. In this article, we will explain how discretionary trusts work, the key benefits for small business owners, and the steps involved in establishing a trust.
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What is a Discretionary Trust?
A discretionary trust is a legal arrangement where assets are transferred into a trust, and trustees are appointed to manage those assets on behalf of one or more beneficiaries. Unlike other types of trusts, the beneficiaries of a discretionary trust do not have a fixed right to the income or capital. Instead, the trustees have the discretion to decide how and when the assets are distributed, based on the beneficiaries’ needs and circumstances.
This flexibility is one of the main reasons why discretionary trusts are particularly useful for business owners. They allow you to protect your assets while retaining control over how and when those assets are passed on to your family or other beneficiaries.
Why Should Small Business Owners Consider a Discretionary Trust?
As a small business owner, you have likely worked hard to build your business and accumulate wealth, both personally and within your company. However, without proper planning, your assets may be vulnerable to inheritance tax, creditors, and family disputes. A discretionary trust offers a range of benefits that can help you safeguard your business and personal assets while providing financial security for your loved ones.
- Inheritance Tax (IHT) Planning
One of the primary concerns for small business owners is the impact of inheritance tax on their estate. In the UK, inheritance tax is charged at 40% on estates above the tax-free threshold (currently £325,000). For business owners, this can pose a significant burden on your family or other beneficiaries, especially if much of your wealth is tied up in your business.
By placing assets, including shares of your business, into a discretionary trust, those assets are no longer considered part of your estate for inheritance tax purposes (subject to the seven-year rule). This means that you can potentially reduce the value of your taxable estate and minimise the inheritance tax liability for your beneficiaries.
In some cases, Business Property Relief (BPR) may also be available, which can further reduce the IHT payable on your business assets. BPR provides relief of up to 100% on qualifying business assets, and using a discretionary trust in conjunction with this relief can be an effective strategy for reducing your overall tax burden.
- Asset Protection
Running a small business often comes with financial risks, such as creditor claims, litigation, or personal liabilities. A discretionary trust can help protect your personal and business assets from these risks, ensuring that they are preserved for your family’s future.
Once assets are placed into a discretionary trust, they are no longer owned by you personally. This means that creditors cannot easily make claims against the trust’s assets, as they are held separately from your personal estate. For business owners, this can provide peace of mind that your family’s financial security will be protected, even in the event of financial difficulties or legal disputes.
Additionally, if you are concerned about your beneficiaries mismanaging their inheritance—such as in cases of young children or vulnerable individuals—a discretionary trust allows the trustees to manage the assets on their behalf. This ensures that the assets are used responsibly and in line with your wishes.
- Flexibility in Distribution
As a business owner, you may have beneficiaries with different needs and circumstances. For example, some family members may be actively involved in your business, while others may not be. A discretionary trust allows you to tailor the distribution of your assets to reflect these differences.
The trustees have the discretion to decide which beneficiaries receive distributions from the trust, when they receive them, and how much they receive. This flexibility ensures that your assets can be distributed in a way that is fair and appropriate, based on the needs of each beneficiary at the time.
For instance, if one of your beneficiaries is pursuing higher education, the trustees can provide financial support for their studies. Alternatively, if another beneficiary is already financially stable, the trustees may choose to delay distributions until a later time. This approach allows the trust to adapt to changing circumstances, ensuring that your wealth is managed and distributed in a way that aligns with your long-term goals.
- Avoiding Family Disputes
Family disputes over inheritance can be particularly damaging, both financially and emotionally. Discretionary trusts help minimise the risk of such disputes by giving the trustees the power to make decisions about how the assets are distributed, rather than beneficiaries having an automatic entitlement.
By appointing impartial trustees—such as professional trustees or trusted family members—you can ensure that decisions are made fairly and in the best interests of all beneficiaries. This can help to reduce tensions and disagreements over the division of your estate, particularly in situations where family members may have conflicting expectations.
For small business owners, this can be especially important when some family members are involved in the business, while others are not. A discretionary trust allows for a more nuanced approach to dividing assets, taking into account the different roles and contributions of each beneficiary.
How to Set Up a Discretionary Trust
Establishing a discretionary trust involves several important steps, and it’s crucial to work with an experienced solicitor to ensure that the trust is set up correctly and in line with your estate planning objectives. Here’s an overview of the process:
- Identify the Assets to Place in the Trust
The first step is to decide which assets you want to transfer into the trust. For small business owners, this might include shares in your company, property, investments, or other valuable assets. You’ll need to consider both your personal and business assets and how they will be managed within the trust.
It’s important to think about the long-term goals of the trust and how the assets you place into it will help achieve those goals. For example, if you want to ensure the continued success of your business after your death, you may want to place business shares in the trust to provide financial support for your family while keeping the business operational.
- Appoint Trustees
The trustees are responsible for managing the assets in the trust and making decisions about how and when distributions are made. You can appoint family members, trusted friends, or professional trustees, such as solicitors or accountants.
It’s essential to choose trustees who are capable of managing the trust’s assets responsibly and impartially. Many business owners choose to appoint a mix of family members and professionals to ensure that the trust is managed both with an understanding of family dynamics and with professional expertise.
- Draft the Trust Deed
The trust deed is the legal document that sets out the terms of the trust, including the powers and duties of the trustees, the beneficiaries, and the conditions for distributions. It’s important to ensure that the trust deed is carefully drafted to reflect your specific intentions and goals.
In addition to the trust deed, you may wish to provide the trustees with a Letter of Wishes. This document, while not legally binding, gives the trustees guidance on how you want the trust to be managed and how you would like distributions to be made.
- Transfer the Assets into the Trust
Once the trust deed is in place, you will need to legally transfer the assets into the trust. This may involve transferring ownership of business shares, property, or other assets to the trustees. Once the assets are in the trust, they are no longer part of your personal estate and will be managed by the trustees in accordance with the terms of the trust deed.
- Register the Trust with HMRC
In the UK, most trusts must be registered with HMRC’s Trust Registration Service (TRS). This ensures that the trust complies with relevant tax regulations, including inheritance tax, income tax, and capital gains tax. Your solicitor can help you with this process and ensure that the trust is fully compliant with HMRC requirements.
Tax Considerations for Discretionary Trusts
While discretionary trusts offer significant advantages, they are subject to their own tax regime. Trustees are responsible for paying tax on the trust’s income and capital gains, and there may be periodic inheritance tax charges on the trust’s assets. However, with careful planning, these tax liabilities can be managed effectively, and the benefits of the trust will often outweigh the costs.
It’s important to work with a solicitor who understands the tax implications of discretionary trusts and can advise you on how to structure the trust in the most tax-efficient way. At Blackstone Solicitors, we specialise in helping business owners navigate the complex tax landscape and ensure that their trust is set up to minimise tax liabilities.
Is a Discretionary Trust Right for You?
For small business owners, discretionary trusts offer a powerful and flexible tool for protecting assets, managing family wealth, and minimising tax liabilities. Whether you’re looking to ensure the continued success of your business, protect vulnerable beneficiaries, or safeguard your estate from inheritance tax, a discretionary trust can provide the solution.
How we can help
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
How to Contact Our Private Client Solicitors
It is important for you to be well informed about the issues and possible implications of dealing with trusts. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Trust solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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