TRUSTS

• A trust is a way of managing assets (money, investments, land or property) for people. There are various different types of trusts and they are taxed differently. 

• When planning your estate, you want to make sure the people you choose will inherit your assets according to your wishes, that you minimise inheritance tax losses and that your entire property isn’t lost to various potential 3rd party claims. Trusts can achieve your aims, but it’s important to select the right one for your particular needs and circumstances. 

• A trust can be set up at any time or written into your Will. ​

 

Why use a trust?

At LAW4ALL we come across circumstances on a regular basis where trusts should be set up in your lifetime or to take effect upon death. Trusts can be very flexible and can also be efficient for tax planning, they can also protect assets from various potential threats. Below are some advantages of placing assets into trust:

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• Protection against “Sideways Disinheritance”- Prevent your direct bloodline (children and grandchildren) losing out in the event of your dying and your surviving partner remarrying. If you simply leave your estate to your partner and they remarry and subsequently die, it is common for the estate your partner inherited from you to pass to the family of the new partner. A Trust can stop this.

• Protecting the vulnerable - Prevent the situation arising whereby a child with disabilities could lose benefits if they inherit from you through a Will. Inheriting via a Trust means that benefits are not affected.

• Protecting your Children’s inheritance - Prevent an inheritance left to a child who is facing problems (divorce, bankruptcy, addition disorder or many other situations which are often impossible to predict) can be distributed to that child in such a way that it won’t be squandered or misused.

• Probate Costs - Any assets that are held in a Trust can be distributed immediately – thereby removing the need, and the huge cost and time delays, of probate.

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It is important that your estate is protected as best it can be after your death. We can create various Trusts in your Will that act to protect your estate in accordance with your intentions. Trusts also have the potential of being tax efficient.

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For example, a Trust can prevent a member of your family or other beneficiary from using their inheritance in a reckless or extravagant manner, or from simply using it in a way you have not intended. The Trust could mean that a family member can only receive a certain amount (or a certain benefit) from the inheritance at a time, and, after their death, the remaining inheritance passes to someone else. This could mean protecting your property so that it ultimately is inherited by your children, whilst still allowing your spouse or partner to live in the property for their lifetime.

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A Trust can also be used to protect your estate from falling into the hands of an unintended recipient, such as a soon to be ex-spouse or partner of one of your children. For example, if you leave a simple gift to your child when you die, this could inadvertently end up going in part to your child’s spouse if they were to divorce. However by creating a Trust, your Trustees will have control over the inheritance. 

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If you wish to leave an inheritance for a member of your family that is vulnerable, such as someone under the age of 18, a Trust can ensure the young person is adequately provided for without the young person themselves being in charge of the inheritance before they reach the age of 18 (or 25). 

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If you wish to leave an inheritance for a member of your family or friend that has a disability, a Trust can provide funds for the benefit of the person with a disability that are tax efficient. A properly constructed Trust of this type will not interfere with their means tested benefits.

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There are two main types of trusts you might consider: a Will Trust, which is created upon your death and a Lifetime Trust, which you set up during your lifetime; Below we list the advantages and disadvantages of both.

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What is a Will Trust?

A will trust or ‘testamentary trust’ is only created upon death. You set up the trust as part of your Will in order to pass assets on to your family or loved ones.

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There are different types of Will Trusts:

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• Discretionary Trust (or Accumulation Trust) - This trust gives the trustee the discretion to decide which of the Will’s beneficiaries to pass trust assets on to, how much they will receive and when they will receive it. This protects a beneficiary’s money if they are financially unstable for any reason and it means money does not have to pass to a beneficiary who has become wealthy.  Discretionary Will trusts are a popular way of inheritance tax planning. Reasons for this include the fact that assets which are 100% business or agricultural property avoid inheritance tax, and also that the inheritance tax bill is spread over time – it is payable at the outset and then only as and when money is distributed to the beneficiaries.

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• Property Trust - Our home is likely to be our most expensive asset and it is important that it goes to the people that we choose when we choose. If you purchase your home with someone (your partner) you want to make sure that your share goes to who you choose. This trust provides that. For this kind of trust to work, you and your partner or spouse must own the family home in joint names as tenants in common. Each partner sets up a Will with each of you leaving your share of the property in the property trust. When one of you passes away, that share of the property passes into trust. Then if the survivor becomes subject to any 3rd party claims, the other share is protected in the property trust. The protected share will eventually pass to the Will beneficiaries.

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• Life Interest Trust - A life interest trust allows you to specify who will have the rights to your property after you die. It’s very similar to a property trust in that it offers protection from 3rd party claims. The main difference is that a life interest trust protects all your assets and not just your property. It also enables you to choose somebody to benefit from the trust whilst they are alive and at the same time to protect the underlying capital for other beneficiaries after their death.

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What is a Lifetime Trust?

Lifetime trusts as the name suggests are set up during your lifetime and can hold assets that you would like to protect for the benefit of your loved ones. Typically, they are created to protect your home or cash and investments. You continue to benefit from your assets whilst you are alive, but effectively keep them in the ‘safety deposit box’ of the trust.

 

There are different types of Lifetime Trusts:

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• Bare Trust (or Simple Trust) - Assets in a bare trust are held by a trustee until the beneficiary is 18 years old (it’s also possible to state that the beneficiary will receive these at a different age, such as 21 years). Once the beneficiary turns 18 they have the right to all the income and capital of the trust immediately. Beneficiaries are liable for Income Tax and may be liable for Capital Gains Tax. However, they are likely to be exempt from inheritance tax as a bare trust is treated as a ‘potentially exempt transfer’. This means that inheritance tax will only be payable if the settlor dies within seven years of setting up the trust.

 

• Interest in Possession Trust - This type of trust is similar to a life interest trust (see above) except that the beneficiary can receive income from the trust as soon as the trust is set up.

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• Settlor-Interested Trust - Settlor-interested trusts are not trusts in themselves. They are any type of trust in which the settlor, their spouse or civil partner benefits from the trust’s assets in any way. For example, if 'John' has an illness and can no longer work then he might decide to set up a trust. John is the settlor of the trust and the trustees make payments to him. Since he receives benefits from the trust he ‘retains an interest’. The settlor is liable for income tax on all payments made by the trustees and may also be liable for Capital Gains Tax. When the settlor dies, inheritance tax will be payable above the £325,000 tax-free threshold.

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• Vulnerable Beneficiary Trust (or Disabled Trust) - These trusts are set up for beneficiaries who have a mental or physical disability or who are under 18 years of age and have lost a parent. Vulnerable beneficiary trusts can claim ‘special tax treatment’ as long as the beneficiary qualifies under HMRC rules and the circumstances of the trust allow. Broadly speaking, ‘special tax treatment’ aims to tax the beneficiary’s proportion of the trust as if their usual rates, reliefs and allowances applied so that they gain maximum financial benefit. Assets of other beneficiaries of the trust who are not classed as vulnerable must be kept separate for tax purposes.

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