Estate planning advice
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If you’re looking for an effective way to manage your wealth, then you might be considering a trust. Trusts give you control over your assets and how they’re distributed. They’re often easy to set up without cost and they have many uses. For instance, holding assets for a minor or for tax purposes.
Their history dates back to the 12th century, when crusaders needed someone to manage their property while they were away. The underlying principle of trusts remains the same – assets are held in one person’s name for the benefit of someone else.
What distinguishes trusts from other legal arrangements is that assets are held in the name of one or more people (the trustees) for the benefit of one or more people (the beneficiaries).
The person who creates the trust, and transfers in money or other assets, is known as the settlor. The settlor can be a trustee and can also be a beneficiary, although being a beneficiary is uncommon as it makes the trust ineffective for inheritance tax.
Trusts are usually set up in writing, either by a trust deed or in a will, but they can be verbal.
The legal requirements are:
You can put a variety of assets into a trust, including cash, shares, property and land. As well as the control of assets, trusts can be used:
A bare trust is the simplest type of trust. It is often set up by a will, with wording such as ‘I leave £10,000 to each of my grandchildren’. In such a case, if the grandchildren are minors, the money is held in separate trusts for each of them until they reach age 18 (age 16 in Scotland).
The trust is assessed for tax on the beneficiary as if the money were owned in the beneficiary’s name.
Discretionary trusts are widely used. The trust names potential beneficiaries, either by name or by description (such as ‘my children and grandchildren’), but no-one has an absolute right to any income or capital. Instead, the trustees have the power to decide who will benefit from the trust and when, from among the potential beneficiaries.
Discretionary trusts are often used in inheritance tax planning. If a settlor doesn’t want to give money direct to individuals, they can gift into trust to get the money out of their estate while still retaining control (as a trustee) over the money.
If the settlor transfers more than the inheritance nil rate band into a discretionary trust in a seven-year period, there will be an immediate inheritance tax charge on the excess amount at 20%. The trust itself is assessed for inheritance tax every ten years or when money is transferred out to a beneficiary.
If someone cannot manage their own affairs, a Vulnerable Persons Trust may be appropriate because it provides protection and has special treatment for income tax, capital gains tax, and inheritance tax. This type of trust is typically set up by a solicitor.
This more complicated trust can be found in wills, typically of people on their second or subsequent marriage but with children from an earlier marriage. It usually provides for the spouse to continue living in a property, but for the value of the property to pass to their children on their spouse’s death.
A loan trust isn’t a type of trust as such, but describes a trust set up with a loan rather than a gift. The settlor can ask for loan repayments at any time.
Loan trusts are useful for inheritance tax planning as while the original loan remains part of the settlor’s estate, any growth is outside the settlor’s estate. They are popular for those who want to take some steps to manage inheritance tax but don’t yet want to lose access to their capital.
Life insurance is often taken out by younger people for the financial security of their family, or by older people to help with inheritance tax.
Where the policy is on a single life or pays on second death, the benefit will be paid into the estate and so could be subject to inheritance tax at 40%. However, writing the death benefit into trust would allow it to be paid to the beneficiaries tax-free and without the need to wait for probate.
Life insurance companies provide free trust documents for use with their policies. It is best to write policies into trust when they begin, but they can be put into trust at any time.
Most trusts must be registered with HMRC’s Trust Registration Service. The main exception is trusts for life insurance policies that only have a death benefit value.
As trusts usually can’t be changed once they’re set up, it can help to first get specialist advice. A Specialist Financial Adviser from Wesleyan Financial Services can help you with your trust planning and recommend when you should speak with a solicitor.
When you’re ready, you can book an appointment to get advice on trusts and other aspects of your estate planning.
Please bear in mind that advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority.