Agricultural and farming trusts are valuable tools for farming families across England and Wales who wish to protect their estates, plan for the future, and ensure that the family farm remains viable for generations to come. Trusts can help manage complex family dynamics, reduce tax liabilities, and provide a structured approach to inheritance planning. However, there are common pitfalls that can arise when setting up or managing these trusts, which can lead to legal complications, tax issues, or even family disputes.
Understanding these potential mistakes and knowing how to avoid them is essential to making the most of agricultural trusts. In this article, we will discuss some of the common errors associated with setting up farming trusts and provide practical advice to help you navigate the process effectively.
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What Is an Agricultural or Farming Trust?
An agricultural or farming trust is a legal arrangement where ownership of farming assets—such as land, buildings, machinery, and livestock—is transferred to trustees who manage the assets on behalf of beneficiaries. This structure can help control how the farm is managed, ensure that it is passed on according to the settlor’s wishes (the person setting up the trust), and offer certain tax benefits.
When used correctly, a farming trust can protect the farm from creditors, enable efficient inheritance planning, and help minimise tax liabilities. However, failing to approach the process carefully can result in unintended consequences that may undermine these benefits.
Common Mistakes to Avoid
Setting up and managing a farming trust involves navigating complex legal and tax issues. Below are some of the common mistakes to watch out for and strategies to avoid them:
- Failing to Seek Specialist Legal Advice
One of the most significant mistakes farming families make is not consulting a solicitor who specialises in agricultural law and trusts. Agricultural estates have unique legal considerations, including inheritance tax reliefs such as Agricultural Property Relief (APR) and Business Property Relief (BPR). These reliefs are subject to specific conditions and can be lost if not handled correctly.
To avoid complications, always seek advice from a solicitor experienced in agricultural trusts. At Blackstone Solicitors, we offer expert guidance on the legal intricacies of farming trusts and can help you navigate the process with confidence.
- Choosing the Wrong Type of Trust
There are different types of trusts that can be used for agricultural estates, such as discretionary trusts, life interest trusts (also known as interest in possession trusts), and bare trusts. Each type of trust has its own advantages and limitations, and the choice will depend on your specific objectives and family circumstances.
For instance, a discretionary trust gives trustees flexibility in distributing income or assets, making it suitable for complex family situations where future needs are uncertain. In contrast, a life interest trust may be more appropriate if you want to provide for a surviving spouse while ensuring that the farm ultimately passes to your children.
Choosing the wrong type of trust can lead to unintended tax implications or fail to provide the intended level of protection for the farm. It is crucial to understand the different types of trusts and select one that aligns with your goals.
- Not Maximising Agricultural Property Relief (APR)
APR can significantly reduce inheritance tax on farming assets if certain conditions are met. However, the relief is not automatic and can be lost if the farm does not qualify as agricultural property at the time of the transfer or if it is not used for agricultural purposes.
To maximise APR, ensure that the land and buildings meet the criteria for agricultural use and have been used for farming purposes for at least two years before the transfer (or seven years if they are owner-occupied). Additionally, non-agricultural assets, such as certain farm buildings or land used for other purposes, may not qualify for APR.
It is advisable to review the ownership structure and use of the farm to ensure that APR can be claimed. Your solicitor can help you assess the farm’s eligibility and advise on any changes needed to maximise the relief.
- Poorly Drafted Trust Deeds
A trust deed is the legal document that sets out the terms and conditions of the trust, including the roles and responsibilities of the trustees, how the assets will be managed, and how the income or capital will be distributed to beneficiaries. A poorly drafted trust deed can lead to ambiguities, legal disputes, or even render the trust invalid.
To avoid these issues, make sure the trust deed is comprehensive and clear. It should address key details such as:
- The identity of the trustees and beneficiaries
- The powers and duties of the trustees
- The rules for distributing income and assets
- Any conditions or restrictions on the use of the trust assets
Working with an experienced solicitor is essential to ensure that the trust deed is properly drafted and meets all legal requirements.
- Failing to Appoint Suitable Trustees
The trustees play a crucial role in managing the trust’s assets and ensuring that the trust operates in accordance with the settlor’s wishes. Failing to appoint suitable trustees can jeopardise the management of the trust and lead to conflicts or mismanagement.
It is important to appoint trustees who are reliable, impartial, and have the necessary skills to manage the farm’s assets. In some cases, it may be appropriate to appoint professional trustees, especially if the estate is complex or if there are potential conflicts between family members. However, consider appointing at least one family member who understands the farming business, as they may be able to provide valuable insights into the day-to-day operations.
- Overlooking Tax Implications
Trusts are subject to various tax rules, including inheritance tax, capital gains tax, and income tax. Failing to understand these tax implications can result in unexpected liabilities that could erode the value of the trust’s assets.
For example, while agricultural assets may qualify for APR, not all assets within the trust may be eligible for the same level of tax relief. It is important to seek advice on how different types of assets will be treated for tax purposes and structure the trust in a way that minimises tax exposure.
- Neglecting to Review the Trust Regularly
Farming operations and family circumstances change over time, and what may have been suitable when the trust was first set up may no longer be appropriate. A common mistake is to set up the trust and then fail to review it regularly.
Regular reviews are essential to ensure that the trust continues to meet your objectives, remains compliant with current tax laws, and reflects any changes in family dynamics. For example, if a beneficiary’s financial circumstances change, or if there are new births or deaths in the family, the trust may need to be updated to accommodate these changes.
- Ignoring the Impact of Divorce or Bankruptcy
If a beneficiary goes through a divorce or becomes bankrupt, the assets within the trust may be at risk. While trusts can offer some protection, it is important to consider additional safeguards, such as a discretionary trust structure, which gives trustees the discretion to distribute assets as they see fit, rather than providing a fixed entitlement to beneficiaries.
This approach can help protect the trust’s assets from being included in divorce settlements or being seized by creditors in the event of bankruptcy.
Practical Steps to Avoid These Mistakes
To avoid these common mistakes and ensure your agricultural trust is effective, consider taking the following steps:
- Consult an Experienced Agricultural Solicitor: Seek advice from a solicitor with expertise in agricultural trusts, estate planning, and tax law. This will help you navigate the complex legal requirements and make informed decisions.
- Clearly Define Your Objectives: Outline your goals for the trust, including protecting the farm, providing for family members, or minimising tax liabilities. This will guide the choice of trust type and the terms of the trust deed.
- Regularly Review and Update the Trust: Schedule periodic reviews to ensure the trust remains suitable for your current circumstances and reflects any changes in the law.
- Appoint Skilled Trustees: Choose trustees who understand the responsibilities involved and can effectively manage the trust. Consider including professional trustees if necessary.
- Plan for Potential Risks: Address risks such as divorce, bankruptcy, or changing tax rules by setting up appropriate safeguards within the trust structure.
Conclusion
Agricultural and farming trusts are essential tools for protecting your estate and planning for the future. However, common mistakes can undermine their effectiveness, leading to legal disputes, tax issues, or family conflicts. By understanding these pitfalls and taking steps to avoid them, you can ensure your trust is set up correctly and achieves your objectives.
How we can help
We have a proven track-record of helping clients create Trusts. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Wills and Probate Solicitors
It is important for you to be well informed about the issues and possible implications of creating a Trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.
To speak to our Wills and Probate 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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