Retaining Control Or Influence When Setting Up A Trust

While trusts are widely used for succession planning and family wealth management, they require a genuine transfer of legal ownership and decision-making authority.

Ceding control is often the most difficult aspect of establishing a trust. Transferring valuable assets into a structure that a client no longer legally owns or directly controls raises understandable concerns, particularly where those assets have been built up over many years.

Clients therefore often ask whether they can retain some influence as settlor (the individual who establishes the trust and transfers assets into it is referred to as the "settlor". The answer is generally yes, with careful planning, during your lifetime, and only to a limited extent.

Attempting to retain too much control risks the trust being challenged on tax, insolvency, family law or other legal grounds. Mechanisms such as trustee selection or carefully drafted powers can provide comfort, but must be structured with care.

How We Can Help

We are experienced specialists in advising on the structuring and operation of trusts, particularly where clients wish to retain an appropriate degree of involvement without undermining the effectiveness of the arrangement.

In practice, the key issues arise not only in drafting, but in how a trust is implemented and operated over time. Our role is to ensure that client objectives are achieved as far as possible, while managing legal and tax risk.

We typically assist by:

• Structuring trusts where retaining influence is a priority - advising on the extent to which involvement can be retained without crossing into full control, and identifying key risk areas at the outset

• Drafting appropriate trust provisions - including carefully balanced powers (such as trustee appointment or removal) and clear governance frameworks to preserve independence

• Advising on trustee choice and roles and restrictions - assisting in the selection of trustees who are both trusted and demonstrably independent, often the most critical factor in practice

• Preparing letters of wishes and guidance documents - articulating the settlor’s intentions clearly while ensuring they remain non-binding and do not fetter trustee discretion

• Advising on legal compliance in practice - providing ongoing guidance to ensure the trust does not drift into informal or “shadow” settlor control over time

Keep Control After Setting Up a Trust?

In short you can potentially keep some direct control but you may well lose many of the advantages associated with creating a trust (see below regarding Revocable Living Trusts).

Short of this, as a matter of English law, control passes to the trustees (who manage the trust and make decisions), while enforcement rights rest with the beneficiaries (those who benefit from the trust).

A settlor retains only those powers expressly provided for in the trust instrument, such as the ability to appoint or remove trustees.

It is possible for a settlor to act as a trustee. However, this significantly heightens the issue of control. In that capacity, the settlor must act strictly as a fiduciary and not as owner. In practice, this can be difficult to demonstrate, particularly where the settlor dominates decision-making or acts as sole trustee.

Retaining Lifetime Influence

During your lifetime, you may want to retain a degree of control.One option is a revocable trust, under which you can retain the power to unwind the trust and recover the assets at any time. However, excessive control during lifetime may still undermine the validity or effectiveness of the structure.

Revocable (Living) Trusts offer flexibility and ongoing control, but come with clear trade-offs:

• Greater control and ability to reverse decisions - you may alter or unwind the arrangement if circumstances change.

• No effective tax separation - For UK tax purposes, the trust is treated as though income and gains on assets were still held personally.

• Limited asset protection - Assets are more likely to be treated as belonging to the settlor if challenged.

• Increased scrutiny - The structure is more vulnerable in contentious situations where control is examined

A revocable lifetime trust can be drafted so that:

• It is fully revocable during the settlor’s lifetime (the settlor can amend or unwind it), and

• It automatically becomes irrevocable on death, with new terms taking effect. At that point, the trust effectively “locks in” and continues as a standard irrevocable trust.

Legal Risks Of Trying to Maintain Control

Where a settlor moves beyond influence into effective control, the consequences can be significant, including :

• Tax exposure - income and gains being attributed to the settlor.

• Claims from creditors or in family proceedings - assets being treated as available to the settlor.

• Challenges to trustee decision-making - decisions being questioned where trustees are not acting independently.

• The trust being disregarded in substance - in extreme cases, the structure being treated as ineffective

Legal challenges may arise from HMRC, beneficiaries, creditors or insolvency practitioners seeking access to the assets and/or in the case of divorce, assets might be claimed as in reality still owned by the spouse. In each case, the central question is who exercises control over the assets in reality.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.