Family trusts need to be reviewed to combat forthcoming tax increases announced by the government, an expert has warned.

It follows this year's Budget changes, which proposed increases in the marginal income tax rate from April 6, 2010, to 42.5 per cent on dividends and 50 per cent on other income for individuals earning over £150,000.

Eamonn Daly, senior trust and tax executive with Stratford-upon-Avon law firm Lodders, said these highest marginal tax rates for individuals will also apply to income of over just £1,000 received in discretionary trusts.

The changes to trust tax rates are in order to prevent additional rate tax payers sheltering their income from their own tax rates but there could be ways of mitigating them.

Discretionary trusts provide the maximum flexibility by giving the trustees power to decide when and how money should be paid out.

Mr Daly said: "These trusts can be used as a tax efficient and flexible way to pass cash or other assets to your family or other beneficiaries including young children or even those not yet born, whom you would like to help, both during your lifetime and after your death.

"They can be used to protect your assets, provide for the family in the future, for example by funding education for grandchildren, and to prevent assets leaving the family altogether."

Mr Daly said one way out of the new additional tax charge was for the trustees to give the beneficiaries an immediate entitlement to income so that it is chargeable to tax at their own marginal rate. The trustees can still retain overriding powers to change future entitlements

Another way to potentially reduce the tax charges would be to invest in low or non-income producing assets and pay capital rather than income to the beneficiaries. Capital gains realised in a trust (above the trustees' annual exemption - £5,050 for 2008/09) are taxed at 18 per cent.

"Alternatively trustees could consider single premium investment bonds which do not produce income until they are wholly or partially encashed," said Mr Daly. "Historically, however, these bonds have suffered from unclear charging structures and lack some flexibility.

"Generally the beauty of trusts is their flexibility but it is essential to keep them under review to take advantage of, or overcome, future legislative changes."