Asset Planning

Introduction Some goals of asset planning are : –divesting assets –splitting income carried from assets or investments –reducing tax that would otherwise be paid by the taxpayer. Trusts are the most common methods used, other vehicles include: companies, partnerships, gifts.

Considerations The main aim is to spread taxation and consider a reduction in assets Wills should be reviewed. It may not be desirable to leave everything to each other Use Matrimonial Property Act to effect equality of shares and put all jointly sued property as tenants in common in equal shares. Possible use of mirror trusts - to make children and grand-children benefit and you a benefit in each other.

Why have an asset plan? Instances asset planning might be necessary: – excess assets: – for duty – for benefit – matrimonial property – second marriages – residential care subsidies There may also be a need to protect family assets in a number of situations: –possible bankruptcy –involvement in a business venture –other

Discretionary Trusts The discretionary trust has long been a common mechanism for asset planning purposes. The grant of ownership to the trustees is an effective means of asset protection. By placing income producing assets in the trust and dividing the income between beneficiaries it can also be used as an income splitting device. Discretionary trusts are also sometimes called sprinkler trusts.

Limitations The settlor must be solvent when the trust is created as the Property Law Act 2007 makes transfers of assets with the intention to defeat creditors voidable by the Official Assignee. The trust must be in place at least two years before bankruptcy as the Insolvency Act allows the Official Assignee to recover assets from the trust.

Characteristics The trustees have a wide discretion (subject to the trust deed) as to how the assets are dealt with. This is desirable as it limits the risk that the trust is seen as a sham. However the settlor usually retains the ability to select and dismiss trustees. Note that the settlor no longer directly controls the assets placed into trust. There will be ongoing administration costs. Notionally beneficiaries have no particular right to expect anything from the trustees.

Registered Companies Companies have long been a favoured way of protecting assets. Sole traders can set up a company and sell their business to it in return for shares. Shares can be issued with or without voting rights so the control of the company can be maintained by the original founder and non-voting shares can be distributed to family members.

Companies for asset protection As companies have their own legal identity they are an excellent device for asset protection purposes. Shareholders and directors will almost never be held liable for the debts of the company (unless they have executed guarantees). Directors who breach their duties under the Companies Act 1993 can also be personally liable for the company’s debts.

Companies as income splitting devices Companies can be used as a means of income splitting through the use of dividends. While the company itself will pay tax at 33% high income shareholders may be at a marginal rate of 39%. Other individual shareholders can be within the income limits for a lower rate.

Companies and the PRA If one partner holds more than 50% of the voting shares in a company ( a ‘controlling interest’) it is a ‘qualifying company’ in terms of the Property (Relationships) Act. This means the spouse how holds the controlling interest may have to pay compensation for any relationship property transferred to the qualifying company.