Trusts still have a role in saving tax and preserving family wealth
Since the changes in inheritance tax brought about but the Finance Act 2006, trusts have been the subject of many debates. Many claimed that the changes would spell the end of trusts but our view is that trusts still have much to offer, particularly in relation to succession planning and the saving of inheritance tax ("IHT").
What is a trust?
A trust arises where assets are transferred by one party ("the settlor") to other individuals ("the trustees") to hold for the benefit of others ("the beneficiaries"). The trustees owe a duty of care to the beneficiaries when managing the trust assets. A trust can be set up during your lifetime or under the terms of your Will.
Why would I want to set up a trust in my lifetime?
There are various types of trusts but the most useful is the Discretionary Trust. If assets are put into this type of trust and you survive seven years then they will not form part of your estate on death. Assets can also be transferred into them generally without incurring a Capital Gains Tax charge. So one or more of the following may apply to you:
- Succession planning - you may wish to pass on shares in a family company or other business interests to your children, but worry that they lack business experience or that the shares will be at risk, say, if they divorce in the future. By using a trust, you can take advantage of reliefs for "qualifying" business assets and benefit your children, but still retain decision making power and overall control of those assets by being appointed as one of the trustees.
- Estate and tax planning - you may wish to start passing monies or property down to the younger generations, but consider that they are not yet ready to hold those assets in their own right. A trust will allow you to provide for your children or grandchildren and begin the process of passing assets out of your estate for inheritance tax purposes, but again retaining control as a trustee.
- You may wish to provide for lump sum pension death benefits to be paid into what is commonly called a "By-Pass Trust". This can minimise the IHT charge whilst still allowing the spouse or other family members to benefit. Trusts can also be applied to life policy proceeds.
- If compensation is received as a result of an injury suffered then by placing these monies into a special Personal Injury Trust means tested benefits will be preserved.
Why would I wish to set up a trust in my Will?
Even with the introduction of the transferable nil rate band it is still important to consider what the tax implication of our death may be especially for our children. We should also consider the best way of organising how our assets pass down the family so one or more of the following may apply to you:
- To provide for a particular person during his or her lifetime, but with the estate (or specified asset) ultimately passing to someone else when that first person dies or remarries.
- To make provision for minor or disabled beneficiaries.
- To provide flexibility and allow decisions to be made regarding your estate depending on the circumstances in existence at the time of your death.
- To consider a Discretionary Trust to preserve assets for children on second marriage and also "ring fence" assets when the possibility of nursing home care fees should be considered.
Existing trusts
Many trusts set up years ago may no longer fulfil their original objectives. They have outlived their original purpose and have become tax inefficient and expensive to run so one or more of the following may apply:<
- Do you already have a trust in place, but have not reviewed it since the changes to the inheritance tax regime or would like to consider bringing it to an end?
- Are you a trustee of a trust requiring advice on your duties and responsibilities?
- Are you a beneficiary of a trust and would like advice as regards your position?
We are here to help and advise. Delay may give rise to unnecessary tax or loss of income so talk to us to see if working together can help you reap the benefits.
Please contact our Will's Trust's and Probate team on the number above.
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