THE rationale behind setting up a trust is often to protect assets and beneficiaries against turbulent times. Offshore trustees have a challenging role when it comes to preserving capital in uncertain markets and balancing the needs of beneficiaries who may have very different demands and circumstances.
In this article we consider the types of issues that we have been discussing with our offshore trustee and beneficiary clients.
-Consider investment performance
While most trustees will have appointed a separate investment manager to invest the funds, the choice of that investment manager usually rests with the trustees. While the trustees can, of course, take the long view when it comes to investment performance, trustees will generally have a duty, so far as is reasonable, to preserve and enhance the trust fund. We encourage trustees to review the performance of their trusts’ investment managers on a regular basis. Many beneficiaries would welcome an update from the trustees and the investment manager at this time.
-Consider each beneficiary’s circumstances and the timings of distributions
If the beneficiary has a personal investment portfolio that has suffered losses, but the trust has gains, (depending on the tax advice) this may be a good time to make a distribution to the beneficiary to enable their personal losses to be set off against the trust gains. There will, of course, be beneficiaries whose usual employment/self-employment has been impacted by the pandemic, and so may be more urgently in need of a distribution at this time. Trustees of discretionary trusts will want to be kept updated of each beneficiary’s personal circumstances.
-Consider if the settlor’s or beneficiary’s tax residence has been affected
With global travel severely restricted, it is important to check the current location of beneficiaries. Some people will be forced to stay longer in a jurisdiction than they had previously anticipated. While the UK and US have recently announced some relaxation to their tax-residence rules for individuals forced to remain in those countries due to coronavirus, it is important to get up-to-date advice if you are concerned about the impact on a settlor or beneficiary’s tax residence.
-Consider tax planning options
If trustees are looking after assets which have significantly depreciated in value, now may be an opportune time to consider tax planning or restructuring. For example, where UK assets are directly held (or the trust holds UK residential property interests), it may be a good time to restructure such interests or potentially appoint them out to a beneficiary and trigger less tax due to the depressed value. It may also be a good time to add further funds to a structure or set up a new structure.
When a UK-resident individual settles assets onto trust, they are treated as making a disposal of those assets at market value for capital gains tax purposes. If assets are standing at a loss, this could be a more attractive time to settle them onto offshore trusts, and protect future gains on those assets from UK tax.
-Encourage beneficiaries to have appropriate wills and lasting powers of attorneys in place
While the focus is often on trustees getting tax advice on how to make a tax-efficient distribution to a beneficiary, in times like these it is important to think about what would happen to the distributed funds on the death of that beneficiary.
This is particularly relevant for the high number of beneficiaries who may be cohabiting with their partners as opposed to having a spouse or civil partner. Someone who cohabits with a beneficiary in the UK (regardless of how long they have been in that relationship) will generally have no rights in respect of the funds of their partner on death. This can lead to distressing and unintended consequences. In some cases the trustees (if there is a power to add beneficiaries) may be able to assist such individuals. However in other cases, it will really come down to whether the beneficiary had executed a will to adequately provide for their cohabitee.
It is in times like these that offshore structures can really demonstrate their value. The flexibility of such structures often enables them to weather economic storms and continue to provide long-term protection for families. We advise trustees, settlors and beneficiaries with structuring and ongoing tax planning matters.