A pretty reasonable trade off (trusts)

So, I had the promised lunch with Larry Largefees, my lawyer, at the Golf Club to discuss making a will. As usual I ended up paying. I suppose that was fair enough as I was picking his brain and getting his initial thoughts for free. But sometimes I wish he would get his own wallet out. After all, I pay him a hefty whack over a typical year.

Anyway, after we had moved on to a rather cheeky Graham’s 1983 port, the conversation turned to the serious matter of death and bequests. Cheery stuff. I explained to him what I wanted to achieve and that I thought I needed to write a will. He explained to me that I already had a will but it dated from the time when I was still with my first wife. Imagine what would have happened if I had “bought the farm” with that still in place! Now I actually get on pretty well with the first wife but she has now remarried and the guy is loaded – so she certainly doesn’t need my cash. This will had left all the income to her for her lifetime and thereafter for our three kids in equal shares. The current Mrs G and our joint progeny would have been left bereft. Whoops.

So I certainly need to rewrite my will but Largefees suggested that it would probably be better to put everything into trust. I would still need a will to tidy up the remnants but, as he explained, assets held in trust would be “outside” my estate, so would not be subject to estate duty or inheritance tax. And I could organise everything properly while I was still around to do it, which would make everything much more simple and straight forward when I no longer was.

After all, I know where all the assets are so can easily arrange a transfer into trust. If I left it to the executors to go and find everything it could take them several years and cost as much as 6% of the total assets to get it all done. And while all that was going on, the assets would be frozen which might cause tremendous difficulties for my loved ones. The trust idea sounded much jollier. The problem is my domicile. If I’m still domiciled in the UK the transfer into trust will cost me 20% of the value of the assets. There’s no way I am going for that. Largefees thought that I was probably no longer UK domiciled because I’d lived abroad for so long but, which must be lawyers’ favourite word, we would need to get certainty on that.

The bit I’m not entirely comfortable with is that by setting up a trust I would lose control of my assets – and that includes all my shares in my own company. I have since had discussions with the proposed trustees who explained they could insert clauses in the trust deed that would mean that wouldn’t interfere in the running of the company and would not be liable for any losses at the corporate level. This would mean that I would be left to get on with it even though, technically speaking, I would no longer be a shareholder.

That seemed a pretty reasonable trade off but I also didn’t want to have to ring the trustees up every time I needed some cash. No problem, they said, we could restructure the capital of my company to create three classes of shares: A shares, which only had rights to dividends; B shares, which only had rights to capital; and C shares, which only had votes. Usually shares have all three characteristics but they can, it seems, be split.

I have checked on this and I like it. The trustees can certainly have the capital (B) shares. This means they get to hold most of the value. I get to hang on to the A class shares, which means I can take the dividends. The value of the A shares should be minimal compared to the B class capital shares. And I will also hold the C class shares so I can continue to manage the company without the need to involve the trustees continually. My will would then state that any B or C shares I still own upon death should be transferred to the trustees.

This seems like an excellent solution to me, so I told them to go ahead. The terms of the trust will dictate that, when I’m no longer around (perish the thought), the trustees will have to make the decision as to whether to sell the company or keep it together. I have indicated that I would like it to continue for as long as the existing senior management is capable of running it. This all now ties with the long-term incentive plan (LTIP) that I’ve set up. If they’ve done well they will own a decent slice of the company themselves by then.

Either way the trust can be designed to look after the missus in some style during her lifetime. After that, the kids will get some minor bequests and any grandchildren will get their school fees paid, while the capital will be retained with the income being distributed to the charity I’ve set up. That seems to tick every box. Sweet.