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Can trusts still be trusted by wealthy families?

Ceris Gardner writes about the 800-year legacy of trusts in the UK, and why recent bad press might spell an end to this useful estate planning tool.

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Death, taxes and childbirth! There’s never any convenient time for any of them.' So bemoaned Scarlett O’Hara in Margaret Mitchell’s epic romance Gone with the Wind.

Although there is little the UK government can do about death or childbirth, tax campaigners are lobbying for the government to implement a complete reform of the UK trusts system to ensure that payment of tax cannot be avoided. This call for reform was triggered by the recent death of Gerald Cavendish Grosvenor, the 6th Duke of Westminster and the third richest man in Britain. The Duke’s estate, which was cultivated by a 1677 marriage between Sir Thomas Grosvenor and Mary Davies, the twelve-year-old heiress to an area of ‘swampy meads’ west of London, now comprises some of London’s swankiest addresses, including Chester Square, Grosvenor Square, and the Gagosian Gallery.

The estate is to be inherited by the Duke’s eldest son, Hugh Grosvenor, who is set to inherit a legacy worth more than £9 billion. However, as the majority of the estate is held via a series of trusts, the Duke’s death will not trigger the standard 40 per cent inheritance tax death charge.

This use of trusts has been branded by the nation’s press as flagrant tax abuse, with the Duke of Westminster’s name (according to the Guardian) ‘synonymous with tax avoidance in the UK’. Trusts have been labelled as contrived structures designed to keep wealth in the hands of the few, with John Christensen, director of the Tax Justice Network, commenting that, thanks to trusts, ‘for people who are really wealthy, inheritance tax has become an optional choice’.

Such negative press attention is dangerous. First, the information it disseminates is (in places) just plain wrong. Although it is true that the 40 per cent inheritance tax death charge will not be paid on the Duke’s death on the entirety of his estate, this is because (as the assets are held in trust) they are not part of his estate and so his death is not a chargeable event. However, if (as believed) the trusts are discretionary, the trustees do pay a periodic charge every ten years, designed to replicate the 40 per cent death charge once a generation.

Thus, the suggestion that trusts are a symbol of tax avoidance is inaccurate.This attention is also damaging, as it obscures the many legitimate and compelling reasons for settling assets into trust. The English legal concept of a trust is believed to have been developed around 1200AD, during the time of the Crusades, when knights departing the country conveyed ownership of their lands to trusted individuals to allow their estates to be managed and feudal dues paid and received, on the understanding that the ownership would be conveyed back on their return.

Since then, trusts have remained a robust and flexible tool for estate planning, allowing families to promote effective succession (partly by alleviating the need for probate) while also protecting the assets they have worked hard to build up. Many countries have proverbs about wealth being dissipated in three generations.

Anecdotally, 65 per cent of family wealth is lost by the second generation and 90 per cent by the third. Setting up a trust is a way of making sure that a family’s assets are used for the benefit of the family members, with the added protection that the trust fund may be less easily squandered by an overenthusiastic heir (and his ne’er-do-well friends). The benefit of this is that it allows large estates (such as the Grosvenor estate) to be preserved, rather than being repeatedly divided equally between all children.

Further, while trusts can be used to protect an inheritance from wayward family members, equally they can protect a family from their inheritance. Many wealthy families do not want
their children to inherit family wealth in a lump sum at a relatively young age, with some fearing a large influx of wealth may negatively impact their children’s work ethic. The late Duke of Westminster himself said of his son and heir: ‘He’s been born with the longest silver spoon anyone can have, but he can’t go through life sucking on it.’

With all the negative recent publicity surrounding trusts, it could be argued that their days are nearing an end. With pressure mounting for the government to make public a new central register of trusts, containing the names of beneficiaries and settlors, the comfortingly private nature of trusts may soon be a thing of the past.

However, despite these attacks, the trust remains a highly useful estate planning tool used on the whole for perfectly legitimate reasons. It seems to me that, 800 years on, it is still going strong. Here’s to the nation’s trust in trusts remaining unwavering for many years to come!