There is a Chinese proverb that says, “One generation plants the trees; another gets the shade”. In other words, life is a circle. A little baby becomes a teenager, who becomes an adult, who becomes a parent and the process continues. This Chinese proverb is at the heart of succession planning: creating a legacy to benefit future generations.
Many people have accumulated substantial wealth with years of hard work and astute management. But history is rich with stories of many such individuals whose focus has been primarily on wealth creation but little to no focus on wealth preservation and succession planning. They have paid the cost of taking no action. Planning for what happens after we are no longer around is not always easy. But succession planning is essential to ensure the smooth, clear and structured transition of wealth to successive generations.
Trusts can serve as a powerful tool in this type of planning. No family situation is the same and therefore the setting up of a trust will vary from family to family. There is no “one size fits all” solution. However some of the key uses of a trust are presented below.
Avoidance of Probate
Many clients opt for the will solution in estate planning. But while this appears to be a simple solution, wills are subject to probate procedures after one’s lifetime. Probate is the legal process of settling an estate of the deceased person. It can be a lengthy process which can result in assets being frozen for some time before being distributed to your loved ones. It is also expensive, intrusive and can be unwelcomed at a time when loved ones are grieving.
Trusts, on the other hand, are completely confidential, and on the passing of a person his or her assets can be distributed without any delay or formal legal process.
Controlling the Time and Distribution of Wealth
Depending on your loved one’s situation, you may not want your assets to pass outright to them immediately after your lifetime. A trust is a very flexible vehicle. In a trust you can allow, for example, for a spouse to receive income during his or her lifetime with capital then being distributed to your children after your spouse’s passing. Trusts can also protect the interest of your children in the event of remarriage of your spouse.
In a trust, funds can be held for a period of time to pay for the education of your children or grandchildren. They can also protect the interests of those loved ones who may not be able to manage their own affairs such as the aged, the disabled and infants.
Planning to Navigate through Obstacles of Life
Even though you may be well and able today, no one can predict what will happen in the future. A trust can provide for your own care and maintenance with the trustee making regular payments to you in your golden years, including payments to hospitals or care providers for your ongoing health and medical support.
Forced Heirship
In some civil law jurisdictions, laws might dictate how your estate should be distributed and in what proportions. Perhaps these forced distributions may not be in accordance with your wishes. A trust can be used to overcome these issues since the legal ownership of trust is with the trustee. It can allow for the transfer of wealth to others in accordance with your wishes and not in accordance with the laws of the country where you live.
Consolidation and Protection of Assets
Oftentimes clients have assets in various jurisdictions and want to preserve these assets against uncertainty, political, economic or social instability. Because a trust is a private legal arrangement between you and the trustee, information in respect of the nature of these assets is kept confidential. In addition, the ownership of all of these diverse or multi-jurisdictional assets is consolidated in one location, creating a one-stop-shop for the client.
Tax Planning
Assets transferred into a trust structure allow the transfer of wealth in a tax-efficient manner. Trusts can also help to mitigate the impact of ongoing tax liabilities as the assets transferred into the structure are no longer in your name but in held in the name of your trust.
Business Succession
In some cases a large proportion of a client’s wealth is built through successful operating businesses. Clients are often concerned to see that these businesses continue after they are no longer around. A Private Trust Company (“PTC”) may be the solution to meet the needs for a smooth transition of these operating businesses to the next generation.
Trusts can be set up for each child and their families to allow each child the flexibility over their own pool of assets. A plan can be developed with respect to the operating businesses. This type of structure could minimize family disputes and prevent the liquidation of the operating businesses. It can also be arranged to involve children and grandchildren in the operating business. Given the complexities involved in this type structure, experienced advisors should be consulted to ensure proper structuring.
The above are just a few of the uses and benefits of trust structures. In all cases, for best planning, it is very important that, prior to establishing a trust structure, you should seek legal or tax advice to ensure the success of such structure.
Ansbacher (Bahamas) Limited (“ABL”) is one of the oldest trust companies in the Bahamas, providing services to clients since 1957. Most of the original clients are still with ABL. ABL takes pride in its services and is constantly listening to clients to provide new products and more efficient services.
