How discretionary trusts can help farm succession plans

Succession discussions can be difficult for any family, but particularly so for farmers with high-value assets often intertwined with a long-term lifestyle choice.

Obstacles include people finding it difficult to discuss who will receive assets following the death of a loved one, tensions or disagreements between family members, and parents wishing to treat their children fairly.

One solution is an ongoing structure such as a discretionary trust, says Aaron & Partners solicitor Ben Brassington.

See also: Joint ventures compared and how they can aid succession

How does a discretionary trust work?

A discretionary trust is a structure that can be used to hold and protect all types of assets.

Trustees are appointed to control the assets and are under a legal obligation to protect them for the beneficiary.

These trustees should be whoever is most appropriate at the time, but this can be reviewed in the future and new trustees can be appointed if necessary – for example, if the trustee dies before the assets are passed on to the beneficiary.

A Letter of Wishes should be drawn up, explaining the strategic wishes of the original holder of the assets (donor/testator/testatrix), to guide the trustees’ decisions.

For example, if the original owner wanted the farm to pass to their child on their 30th birthday, the trustees would liaise with them at this point to discuss whether it was the right time.

The trust structure provides flexibility and protects assets if the owner wishes to gift them in their lifetime, and also takes into account inheritance tax reliefs and exemptions to maximise the value of assets passing to the beneficiaries if it is set up at the point of the owner’s death.

Mr Brassington says: “I often recommend the use of a discretionary trust in farmers’ wills and about 80% of the wills I prepare for farmers use this structure.

“However, it should only be used in appropriate circumstances, where the priority is to protect assets and the beneficiary may be vulnerable and at risk of being taken advantage of.”

Why would you hold assets in a trust?

• Flexibility – if, for example, the potential beneficiaries are under 18, it can be difficult to know if they will want to take on the farm. Putting the farm into a trust means it is protected until a successor becomes apparent.
• Protecting a vulnerable beneficiary – to avoid an individual holding significant assets being targeted by someone wishing to take advantage of them.
• Long-term planning options – if a potential beneficiary already has significant wealth, they may not want to take on further assets and have to pay additional tax. The trust can separate the additional assets from their estate or redirect them to their children, therefore avoiding a potential inheritance charge.
• Protecting the assets’ value – any assets held in a discretionary trust should not be taken into account in any divorce settlement or in any assessments undertaken for means-tested government payments.

A discretionary trust is particularly useful where children are under 18, especially when succession discussions have yet to take place, says Mr Brassington.

“It is important to allow younger members of the family to gain experience of being involved in decisions relating to the farming business and it is sensible for them to become a partner or company director at the appropriate point,” he says.

“The assets of the business can be ring-fenced to the older generation. From a tax-planning perspective, it is often more beneficial for the assets to pass to the next generation under the terms of a will. 

“Having said that, it is important the younger generation feels secure. For example, if circumstances allow, younger members of the family should hold an interest in, or own, the house they live in,” he adds.

Pros and cons

The main advantage of the trust is the flexibility and asset protection it provides.

If it is maintained over a long period of time, the costs of obtaining legal and accountancy advice for the ongoing administration of the trust and meeting the regulatory requirements can become disproportionate.

While starting a trust in a will is straightforward, once the donor dies, there are administrative and financial burdens attached, depending on what assets are involved and what happens during the lifetime of the trust, says Mr Brassington.

This includes maintaining annual financial accounts for HMRC and conducting a review every 10 years.

Case study

John (65) and Angharad (62) have three children: Rob (29), Ellie (24) and Shula (not their real names). The family run a mixed livestock and arable farm and a caravan park.

John and Angharad own all the farmland and buildings. Rob and Ellie are involved in the business, while Shula is not. Ellie is also responsible for managing the caravan park.

The parents want their wills to ensure the assets are passed to their children in the most tax-efficient manner while being protected.

The family farm, partnership and caravan park will be passed to Rob and Ellie, with provision also being made for Shula.

To protect the assets following John and Angharad’s deaths, the couple have put fully flexible discretionary trust wills in place.

A detailed memorandum of their wishes, aims and objectives for the farm, partnership and their personal assets was made to guide the trustees of their wills.

These trustees are family friends who are respected by all the children. They are independent and do not have any conflict of interest in undertaking their role of making decisions about the assets.

They will liaise with the children following John and Angharad’s deaths to decide whether the assets should remain protected within the trust or appointed to Rob, Ellie and/or Shula, in accordance with the memorandum of wishes.

An added benefit of putting a discretionary trust in place is that John and Angharad can update the memorandum of wishes during their lifetimes, while they have mental capacity, to take account of changing family circumstances or objectives.