A Guide to Trusts and Trust Planning
With numerous options available, trusts can be difficult to decipher and complex to plan. Here, Perrys Chartered Accountants provides a straightforward guide to trusts and trust planning.
What is a trust?
A trust is a legal relationship whereby assets, including money, investments, land or property, are placed under the control of a trustee for the benefit of one or more beneficiaries. They can be set up for a number of reasons, including controlling and protecting family assets, managing someone’s affairs because they are too young or incapacitated, and passing on assets while alive or after you die (a ‘will trust’).
There are several different types of trust, so it is important to choose the correct version for your needs.
Why set up a trust?
A trust can provide a tax efficient way to pass on your assets to your chosen beneficiaries (those who will benefit from the trust).
Setting up a trust will allow you to maintain control over assets. For example, the appointed trustees could decide how funds are invested, prevent certain assets from being sold and determine when and how any income is distributed to the intended beneficiary.
In addition, trusts can provide greater protection over assets compared with an outright gift to a beneficiary. For example, against divorce or bankruptcy.
How do I set up a trust?
A trust can be set up at any time. This could either be in your lifetime or written into your Will. When a trust is included in a Will, the trustee is usually appointed as the executor of the Will as well. However, if you prefer to choose a different executor for your Will, then this is entirely at your discretion.
Trusts can generally be tailored to your individual requirements. It is highly recommended that you speak to a trust planning specialist who can help you with choosing the right solution to meet your needs.
How trusts can help to reduce Inheritance Tax
When assets are placed in a trust, they become the property of the trustee and you are no longer the owner. As such, provided the trust is drafted correctly, the assets may fall outside of your estate and, therefore, will not be subject to Inheritance Tax on your death.
A life insurance policy may be put in place to assist with paying Inheritance Tax, so beneficiaries do not have to sell assets to cover the liability. Placing the policy in trust can have several key benefits. Firstly, in the absence of a trust, on death the policy might pay out to your estate and therefore the proceeds would be taxable resulting in a higher inheritance tax bill. In addition, if the policy is written in trust, beneficiaries would be able to access the proceeds as soon as this is paid by the life insurance provider. Whereas the executors of your Will would be unable to access a policy held outside a trust until the grant of probate has been obtained.
Speaking to a trust planning specialist will ensure that your trust is set up correctly, meets your specific needs and your potential inheritance tax liability is minimised.
What are the common types of trusts?
There are a variety of different trusts which serve different purposes. The most common types of trust are listed below:
Absolute or bare trusts
Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all the capital and income of the trust at any time if they’re 18 or older (England and Wales). This means the assets set aside by the settlor will always go directly to the intended beneficiary.
Bare trusts are often used to pass assets on to minors with the trustee looking after them until the beneficiary is old enough.
Interest in possession trusts
These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses). An example of this would be creating a trust for a rental property. The terms of the trust state that, when you die, the rental income from the property will go to your spouse for the rest of their life. When they die, the property will pass to your children. Your spouse has an ‘interest in possession’ and would be entitled to the income. However, they are not entitled to the capital (the property). This can be a great option for ensuring a surviving relative has access to income or the use of an asset for their lifetime but, on their death, the capital value passes back to your intended beneficiaries.
These trusts allow trustees to make certain decisions about how to use the trust income and capital.
Depending on the trust deed, trustees can decide things like what gets paid out (income or capital), which beneficiary to make payments to, how often payments are made and any conditions to impose on the beneficiaries.
Discretionary trusts are sometimes set up to put assets aside for a future need, such as a grandchild who may need more financial help than other beneficiaries or beneficiaries who are not capable or responsible enough to deal with money themselves.
Setting up a trust can be highly complex. Therefore, it is strongly recommended that you speak to a qualified trust planning specialist who will be able to help you navigate the legalities and choose the right trust for you.