Setting up trust upon death and decisions

george4064

My Father passed away in December 2023, everything passed to my Mother which has been straightforward and all sorted. However, my Father was director of a private company limited by shares and owned c30% of the shares in the business.

We had the shares valued as part of the probate process at c£200k, noting that the shares are not traded on an exchange so this was an estimate based on a few metrics. The business does not have much assets (such as land or property), but it it is still running and making a profit. It has not paid a dividend for over 15 years and I understand it does not intend to pay a dividend in the future.

My Father's will stipulated these shares as 'Business Property' and that those assets should be into a Discretionary Trust upon his death. With the beneficiaries being my Mum, followed by me and my two siblings (there are no other children/other relationships, so relatively straightforward).

The will is written in such a way that the executors (my Mum and my uncle) have discretion to not setup the Trust if they feel its in the best interests of the beneficiaries (being my Mum and us 3 'children', children are aged 31, 33 and 37 so all adult are deemed capable of managing such sums of assets).

I feel that the disadvantages to setting up a trust outweighs the advantages, but I might be overlooking something. Welcome any thoughts or pointers please.

We do intend to engage with lawyers, but wanted to get general thoughts first which might help me deal with the lawyers (and their fees!)

Keep_pedalling

I agree with you, I can’t see any benefit in putting the shares in trust and DTs are a right PINTA to manage.

Notepad_Phil

Setting up a trust for such a relatively small amount of value in the shares does seem at first and second glance as being an unnecessary, time-consuming and costly process. Do any of the beneficiaries think a trust is a good idea? If not then do you even need to go to the expense of consulting lawyers?

Marcon

george4064 said:

My Father passed away in December 2023, everything passed to my Mother which has been straightforward and all sorted. However, my Father was director of a private company limited by shares and owned c30% of the shares in the business.

We had the shares valued as part of the probate process at c£200k, noting that the shares are not traded on an exchange so this was an estimate based on a few metrics. The business does not have much assets (such as land or property), but it it is still running and making a profit. It has not paid a dividend for over 15 years and I understand it does not intend to pay a dividend in the future.

My Father's will stipulated these shares as 'Business Property' and that those assets should be into a Discretionary Trust upon his death. With the beneficiaries being my Mum, followed by me and my two siblings (there are no other children/other relationships, so relatively straightforward).

The will is written in such a way that the executors (my Mum and my uncle) have discretion to not setup the Trust if they feel its in the best interests of the beneficiaries (being my Mum and us 3 'children', children are aged 31, 33 and 37 so all adult are deemed capable of managing such sums of assets).

I feel that the disadvantages to setting up a trust outweighs the advantages, but I might be overlooking something. Welcome any thoughts or pointers please.

We do intend to engage with lawyers, but wanted to get general thoughts first which might help me deal with the lawyers (and their fees!)

Setting up a trust would seem pretty pointless. It can't be an employee and no dividends are being paid, so how would the trust ever derive any income other than by selling the shares put into the trust? 

If the business doesn't pay/intend to pay dividends and has few assets, I wonder how the value of £666K was reached? How are you, your mum and siblings going to access that value - what restrictions are there on selling the shares at some future point, and how would they be valued for any such sale?

poseidon1

If the shares currently qualify for 100%  Business Property Relief ( BPR), then the will could be varied to pass the full value of the shares to the three children IHT free and without using any of the father's NRB.

However there can be an advantage in transferring BPR  qualifying shares of a family company to a discretionary trust:

*  in providing a single point of control in respect of voting rights 

* allow the trustees to favour children directly involved in running the company to benefit by allocating shares to them commensurate with their involvement in the business over time.

* where children are under age

* protecting against partial or future loss of 100% BPR (discretionary trust has its own nil rate band, and IHT charge every 10 years at 6% of excess, much lower than 40% on death). Potential future loss of BPR ( as a political measure) should be viewed in the context of how farmers have seen significant reduction to 100% Agricultural Property Relief,  a change intoduced purely as a tax raising measure.

However in the OP's case if none of the factors above apply, and given the relatively low value of the 30% stake, seems difficult to justify there being any benefit of passing the shares to discretionary trust, unless there are other ( unmentioned) family dynamics which might suggest other reasons for retaining the trust.
In other words, what was the father's original rationale for gifting to trust on death rather then outright to children ( for example)? No doubt there could be documented contemporaneous  notes and perhaps a 'letter of wishes' in background to further clarify matters.

Marcon

poseidon1 said:

If the shares currently qualify for 100%  Business Property Relief ( BPR), then the will could be varied to pass the full value of the shares to the three children IHT free and without using any of the father's NRB.

However there can be an advantage in transferring BPR  qualifying shares of a family company to a discretionary trust:

*  in providing a single point of control in respect of voting rights 

* allow the trustees to favour children directly involved in running the company to benefit by allocating shares to them commensurate with their involvement in the business over time.

* where children are under age

* protecting against partial or future loss of 100% BPR (discretionary trust has its own nil rate band, and IHT charge every 10 years at 6% of excess, much lower than 40% on death). Potential future loss of BPR ( as a political measure) should be viewed in the context of how farmers have seen significant reduction to 100% Agricultural Property Relief,  a change intoduced purely as a tax raising measure.

However in the OP's case if none of the factors above apply, and given the relatively low value of the 30% stake, seems difficult to justify there being any benefit of passing the shares to discretionary trust, unless there are other ( unmentioned) family dynamics which might suggest other reasons for retaining the trust.
In other words, what was the father's original rationale for gifting to trust on death rather then outright to children ( for example)? No doubt there could be documented contemporaneous  notes and perhaps a 'letter of wishes' in background to further clarify matters.

It was the lack of any of those factors seeming to apply which baffled me. As you say, what was the original  intention here? I suspect it was tax related, but happily there's a clause in the will which gives the beneficiaries legitimate scope to not establish a trust. OP has already confirmed they are taking legal advice, which makes a lot of sense; that way someone who has all the relevant facts will be able to give a fully informed opinion, rather than the speculation which is so often all people here have to go on when trying to answer helpfully.

george4064

Thank you all for your responses.

@Notepad_Phil that's what I'm potentially thinking (ie don't bother getting lawyers advice), but I feel getting their opinion would be helpful in case we've missed anything.

@Marcon you're right, I think the only reasonable way the shares could be converted to cash is if the company is sold (or if another shareholder(s) will buy us out, but don't think there's appetite for that).

The shares were valued on an average of revenue multiple, EBITDA multiple and another which I can't remember without checking my computer. 

@poseidon1 you're right, under the current rules the shares qualify for 100% BP relief (BPR). Are you suggesting by putting them into a Trust they'll only have the periodic charge applied as a worst case scenario if they no longer qualified for BPR? Seems like this could be an important advantage for a trust. Mum's other assets will definitely be over the NRB including the transfer of Dad's unused allowances and their main residence.

Edit: the company is a small finance consultancy, so pretty asset light (ie no land or machinery is owned by the company).

Marcon

george4064 said:

@Marcon you're right, I think the only reasonable way the shares could be converted to cash is if the company is sold (or if another shareholder(s) will buy us out, but don't think there's appetite for that).

The shares were valued on an average of revenue multiple, EBITDA multiple and another which I can't remember without checking my computer. 


Edit: the company is a small finance consultancy, so pretty asset light (ie no land or machinery is owned by the company).

In that case you've got the same problem whether or not you set up a trust: how do you access the value of the shares? If they aren't readily realisable (or from what you say, realisable at all in the foreseeable future), the probate valuation of £200K looks extremely high. Doubtless someone checked what the company's Articles say about any restrictions on possible purchasers - or at least I hope they did!

poseidon1

george4064 said:

Thank you all for your responses.

@Notepad_Phil that's what I'm potentially thinking (ie don't bother getting lawyers advice), but I feel getting their opinion would be helpful in case we've missed anything.

@Marcon you're right, I think the only reasonable way the shares could be converted to cash is if the company is sold (or if another shareholder(s) will buy us out, but don't think there's appetite for that).

The shares were valued on an average of revenue multiple, EBITDA multiple and another which I can't remember without checking my computer. 

@poseidon1 you're right, under the current rules the shares qualify for 100% BP relief (BPR). Are you suggesting by putting them into a Trust they'll only have the periodic charge applied as a worst case scenario if they no longer qualified for BPR? Seems like this could be an important advantage for a trust. Mum's other assets will definitely be over the NRB including the transfer of Dad's unused allowances and their main residence.

Edit: the company is a small finance consultancy, so pretty asset light (ie no land or machinery is owned by the company).

Yes, the trust can indeed be a safeguard to shelter the value of the shares from a future loss of 100% BPR status ( eg on takeover of a private company by a LSE listed business). It is one of a number  of reasons my firm established discretionary trusts for private company family shareholdings in the past. Whilst in the trust, as long as 100% BPR subsists, no trust 10 year IHT charge arises regardless of any increase in value.

However, unless your mother has a desire to retain access to the shares herself either direct or via the trust, would she have any objections to shares passing immediately to the three of you? I assume you are all fiscally solvent and where married no potential divorces on the horizon? Discretionary trusts often deployed as a protection measure in those scenarios.

Marcon

Notepad_Phil said:

Setting up a trust for such a relatively small amount of value in the shares does seem at first and second glance as being an unnecessary, time-consuming and costly process. Do any of the beneficiaries think a trust is a good idea? If not then do you even need to go to the expense of consulting lawyers?

I think there is merit in consulting lawyers, if only to be quite sure what type of entity this is. A year ago OP was referring to his father being a partner, and said he was in touch with the firm's 'managing partner' https://forums.moneysavingexpert.com/discussion/6501732/valuing-estate-question#latest

That suggests it either was (or might have been at some point in the past) a partnership, possibly one which became an LLP and then for some reason changed structure to a limited company. I'd want to be sure that any partnership/shareholder agreements were being honoured, especially anything relating to the death of a partner/director. If the point has already been checked, well and good.

OP, the other thing that crossed my mind (and apologies - I know you weren't asking about this, but I throw it in just in case it's worth pondering) is the level of your father's shareholding. Although 30% doesn't of course give voting control if all shares carry equal voting rights, there is another 'interesting' number when it comes to shares and passing Special Resolutions: https://www.legislation.gov.uk/ukpga/2006/46/section/283#:~:text=283Special%20resolutions&text=(1)A%20special%20resolution%20of,members%20(see%20Chapter%202).&text=(b)if%20the%20resolution%20so,322A)%5D%20on%20the%20resolution.&text=(b)if%20the%20notice%20of,passed%20as%20a%20special%20resolution.

You might sound out whether the other directors would like to buy some of his shareholding, always assuming you want to realise some cash now and understand the consequences of putting 75% of overall voting power in the hands of others?