Trusts – could they help you?
Trusts can be a helpful way of passing on your wealth in a way that is tax efficient, allows you to retain a level of control, and protects the assets so that those you intend to benefit from them will get the most out of them.
What is a Trust?
A Trust is a way of holding assets for the benefit of others. A Trust is created when someone gifts assets to Trustees to be used for a specific purpose that will benefit certain others. This can be done either during someone’s lifetime or on their death through leaving bequests in a Will.
Why set up a Trust?
Although there are many benefits to setting up a Trust, for the purposes of this article, I will focus on how a Trust can be used by those who wish to pass on their wealth.
- Inheritance Tax (IHT) mitigation
IHT is a tax on the value of your assets (often referred to as your “estate”), generally paid after you have died. The first £325,000 of your estate is taxed at 0% (known as your nil rate band) while the value of your estate that exceeds this will generally be taxed at 40%.
Gifts made during your lifetime generally reduce the value of your nil rate band accordingly. However, if you survive a gift by seven years then it is considered to be outside of your estate for IHT purposes and will not then negatively affect your nil rate band.
During your lifetime, you could gift up to £325,000 of assets (or up to £650,000 with your spouse/civil partner if you are jointly making the gift) into a Trust and, as long as you survive the gift by seven years, the assets held in Trust are no longer considered to be part of your estate for IHT purposes. By making such a gift, you will reduce the value of your estate on which IHT is payable.
Larger gifts can be made into Trust but may potentially require IHT to be paid when it is gifted, but at a reduced rate.
- Retaining control
If you gift assets outright, you lose control of them. The new owner can use them or give away as they see fit.
By gifting assets into Trust, the Trustees retain control of the assets. For example, an adult child could live in a house owned by a Trust, but they could not sell or mortgage it as they do not own it.
Another option is to appoint yourself as a Trustee, and thereby retain control of how the assets are used, even though you do not own them anymore.
- Making use of the assets in the best way
There may be reasons why you should not make outright gifts.
The beneficiary may not manage their personal finances sensibly or they may face bankruptcy; they could be going through a divorce or be under pressure from a dominant spouse or peer group; or they may be struggling with substance abuse issues. A Trust can ensure that the beneficiary has the use and benefit of the assets, but the assets are ringfenced from such loss.
Or, for a couple, they may choose to transfer some of their assets into Trust through their Will when the first of them passes away. The survivor could benefit from the assets during their lifetime, but the assets will pass to their children when the survivor also dies. This can protect the deceased’s assets from passing to the survivor’s new spouse if they have remarried or changed their Will. A Trust can also help protect the deceased’s half of the family home from being utilised for the survivor’s care fees.
A Trust can provide longer term assistance for children/other beneficiaries. Rather than an outright gift providing a large sum that the receiver is not equipped to manage, the Trustees can drip feed the inheritance by way of an allowance, to cover bills directly, or provide a home to live in, for example.
Advice is important
Trusts can be very useful, but it is essential to take professional advice as they can be complex. A professional will help you to consider what it is you’re trying to achieve, and whether a Trust is the best mechanism to do this, as well as explain the technicalities of how to go about putting a Trust in place by raising some of the following points:
- Personally retaining any benefit from assets that you have gifted to a Trust can prevent the IHT benefits of the gift.
- Considering whether you are able to part with assets, taking into account what you will need for your future.
- The administrative cost and burden involved in the setting up and running a Trust, as opposed to you, or others, simply owning the asset(s) outright.
- Trusts have their own regimes for taxation and compliance, which must be dealt with correctly.
- Setting up the most suitable Trust for your situation so that it meets your objectives. There are various types of Trusts, which can be set up in differing ways and with varying degrees of flexibility and options.
- Some Trusts are very specific, such as Trusts for a vulnerable beneficiary, and which require expert advice.
To review your Will or for advice on whether a Trust would be beneficial to you and your Trustees, contact John Pengilley (john.pengilley@bpe.co.uk 01242 248440).
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.