Discretionary Trusts In The Context Of Family Business Succession Planning

• Published date: 15 July 2021
• Subject Matter: Tax, Family and Matrimonial, Inheritance Tax, Capital Gains Tax, Wills/ Intestacy/ Estate Planning
• Law Firm: Wrigleys Solicitors
• Author: Ms Chelsea Martin and Imogen Taylor

Ensuring the future of a family business is often of utmost concern to families and is a crucial decision that requires careful thought and planning.

A discretionary trust can provide a useful structure in order to pass on shares in a family business and offers protection for the benefit of future generations. This article discusses important considerations for succession planning and the use of discretionary trusts in a family business context.

What is a Discretionary Trust?

A trust is a separate entity. When assets are placed into a trust the legal owners, known as the trustees, are usually (but not always and do not have to be) different to the individuals who are the beneficiaries of the trust. This allows for certain individuals to retain control at the same time as passing on wealth and income to other family members. For example, if shares in a family business were gifted into trust, the trustees (who could include the donor making the gift into trust) would have control over the shares and would exercise the voting rights associated with the shares. At the same time, younger family members (as the beneficiaries of the trust) could benefit from any future dividends received and any future capital growth in the value of the shares. Under a discretionary trust, there can be any number of beneficiaries and the trustees have the power to determine which beneficiaries should benefit, as well as when and how they might benefit. The advantages of such a discretionary structure include asset protection, flexibility, and opportunities for tax and estate planning (both for the donor making the gift as well as for the beneficiaries of the trust themselves).

Asset Protection

A discretionary trust structure offers a degree of protection against the potential consequences that could arise if a beneficiary dies, divorces or suffers financial difficulties and is made bankrupt. This is one of the advantages of using a discretionary trust compared to the donor making an outright gift to family members. Assets held in a discretionary trust do not form part of the beneficiaries' own personal estates and so cannot be gifted on by a beneficiary or left under a beneficiary's Will. For a family business where the entire shareholding or a majority shareholding is often owned by a family member, a discretionary trust provides a valuable mechanism to ensure that shares do not end up in the hands of non-family members, and that there is no dilution of a majority shareholding...