Trusts have existed since the time of the Crusades. Over the years, there have been numerous legal cases concerning trusts, and the decisions made in those cases have shaped trust law.
Trusts are adaptable and strong financial instruments that have been used for centuries to:
- manage and safeguard assets;
- transfer money to subsequent generations; and
- accomplish a wide range of financial goals.
In this extensive post, we will go deeply into the complex world of trusts, examining their many uses and advantages and the reasons why they are so important to wealth management and estate planning.
Trust Foundations
1. Recognising Trusts
For the benefit of one or more beneficiaries, trusts are formal agreements that enable settlors (individuals) to transfer assets to trustees. A trust’s fundamental goal is to offer a well-organized framework for managing, controlling, and allocating assets.
2. Trust Participants
There are three principal partners in a typical trust:
- The person who creates the trust and contributes assets is known as the Settlor.
- The Trustee: is the person or organisation in charge of overseeing and managing the trust’s assets.
- Beneficiaries: Those who stand to gain from the trust’s assets and income in the long run.
3. Control of Trusts
The ability to retain control over the assets placed under a trust is one of its most important benefits. As trustees, settlors can frequently exercise their authority and control over the trust’s administration.
4. Asset Distribution
A trust provides a mechanism for asset distribution following the settlor’s passing, particularly for trusts created under a will. This is especially important in complex family settings, such as a second marriage to a person who has children from a previous marriage, where a spouse’s and the children’s financial security is a top priority.
| In the case of Lambe v Eames, the husband wanted to leave money to his family but did nothing to ensure that his wishes were turned into action. The property was left to his widow, and the widow decided to gift the property outside of the husband’s family. As there was no trust in existence, the widow, who was the legal owner under the will, also held the beneficial title. Accordingly, the property was hers to dispose of as she wished. |
Check out our Tax & Trust guide HERE
Providing Safety Through Trusts
1. Protecting Assets
Trusts are a reliable method of safeguarding assets for beneficiaries. Assets that are given outright are more susceptible to dangers like divorce or bankruptcy. Assets placed within a trust, however, are protected from such hazards because beneficiaries do not directly inherit them.
2. Distributions at Discretion
Potential beneficiaries may receive discretionary distributions from trustees, allowing them to meet the trust’s financial needs while protecting its assets. Assets can be shielded from unwanted effects like reckless spending or legal action thanks to this discretion.
Efficiency of Taxes with Trusts
1. Planning for Inheritance Tax
The reduction of inheritance tax obligations is one of the main reasons people create trusts. If certain requirements are met, assets held in particular types of trusts may be excluded from the settlor’s estate for IHT purposes.
When it comes to estate planning, trusts can be especially helpful for reducing taxes like inheritance tax. Trusts can be used in a variety of circumstances to help ensure that your assets flow to the beneficiaries you choose quickly and in accordance with your intentions.
2. Trust Considerations
Trusts can be a potent tool for tax-efficiently transferring money to future generations. A trust is a legitimate way to manage and preserve your assets, to put it simply.
You can decide which of your assets—typically, these include real estate, money, or investments—are held in a trust when you set one up. Then you choose a group of trustees who, with your permission, can administer the duties associated with your estate plans, access your trust, and distribute assets or income to your beneficiaries.
3. What is a trust used for?
Trusts can be used in many different contexts, but they can be particularly helpful when deciding who should inherit your riches and other assets. Generally speaking, they’re a useful tax planning instrument that makes managing your assets throughout your lifetime and handling your estate after your death as easy as possible. They can therefore be a potent tool for assisting in the reduction of inheritance tax.
You must choose a group of trustees when creating a trust so that they can manage it and represent your interests. Trustees are in charge of general responsibilities as well as any reporting to HMRC, the UK tax authority.
There are many factors to consider when deciding whether to create a trust, including:
- To safeguard your wealth.
- Inheritance tax reduction.
- To make provisions for inheritors who are too young to do so.
- To provide specific instructions on how you want your beneficiaries to divide your estate.
In the 1977 case of Paul V Constance – Mr Constance was married to the defendant, although he left his wife in 1965 and later met the claimant and moved in with her in 1967. He never divorced his wife. In 1973 Mr Constance received £950 in relation to a personal injury claim from his employer. He discussed what to do with the money with the claimant and decided to open a bank account. As they were not married the bank advised him to open the account in his own name but assured him that the claimant would be able to draw on the account if she had a signed note from him. Mr Constance had told the claimant that the money was as much hers as it was his. There were three further deposits into the account which came from the couple’s bingo winnings which they played as a joint venture. There was one withdrawal from the account of £150 which was used to buy Christmas presents and food. Mr Constance died intestate in 1974 and his wife, as administratrix of his estate, closed the account and claimed the sums contained in the account formed part of his estate. The claimant argued that the sums contained in the account were held on trust for the benefit of her and Mr Constance jointly. It was judged that there was an express declaration of trust, and the claimant was entitled to the money in the account. |
4. Inheritance Trusts Tax Preparation
You can plan for inheritance tax using a variety of trusts, including the following:
- One of the most popular types of trusts is the Discretionary Trust, which gives trustees the flexibility to distribute income and assets to potential beneficiaries.
A discretionary trust is useful when parents wish to support their offspring and future generations. Payments may be made for healthcare, education, starting a business, or assisting in the purchase of property. This kind of trust can over the years, support several generations of offspring.
- Interest in Possession Trusts, also referred to as Life Interest Trusts, are instruments that enable the income of the trust to be paid out to a designated beneficiary or beneficiaries after expenses have been met. The assets then transfer to children after the spouse’s passing. They are frequently used to provide financial support for a spouse for the remainder of their lifespan.
- Offshore Trusts: These trusts must have at least one trustee based outside of the UK and may not be subject to UK tax.
Offshore trusts are frequently established by people moving to the UK who still have assets abroad and are typically used for those with foreign assets, especially real estate. It is usually advised to get expert guidance because the legislation governing these kinds of trusts is extremely complicated.
- The simplest type of trust is a Bare Trust, which consists solely of a nominee agreement under which a trustee holds property for a beneficiary. As soon as the recipient reaches the age of 18, they are eligible for property and income.
5. Passing on Assets by means of a Trust
You can experience a great deal of peace of mind and lower your Inheritance Tax liability by choosing to leave your possessions to a trust. You might be able to effectively transfer your assets out of your estate and into a “safe” holding by placing them in a trust, protecting them for the people you want to inherit them.
6. Trust Administration
To assist in the appropriate management of the assets and to safeguard them on behalf of any beneficiaries, those in charge of managing trusts have a specific set of duties. Among the duties trustees are supposed to carry out are the following:
- Holding regular meetings and recording conversation logs.
- Examining the trust.
- Filing reports with HMRC as needed.
7. Is any Inheritance Tax due on a Trust?
Although creating a trust does not automatically prevent your estate from being subject to inheritance tax (IHT), doing so would allow you to use the trusts you have already created as part of your estate planning and secure assets for the people you want to benefit from them.
It is imperative to get professional guidance because the laws and taxes that may be used are extremely complex.
Providing thorough planning often involves a series of actions spread out over a 12-to-15-month period, though it may take longer for large estates.
One benefit of taking a step-by-step strategy is that the costs can be spread out over time. Another benefit is that you can participate in the process and comprehend the results of your planning for you and your family.
8. Does the IHT Rate vary depending on the kind of Trust?
Trusts can assist in lowering or even eliminating a 40% inheritance tax charge. Your own circumstances and those of your family will determine the kind of trust you use
Succession Planning and Trust Guidance
Many generations of families have entrusted us with their succession arrangements.
Your individual circumstances should be thoroughly considered when establishing a trust so that the appropriate provisions can be made.
We can talk about how you want your estate to be distributed and help you through the trust-creation procedure.
To discuss any part of your estate arrangements, please get in touch with us on 0118 934 7920.
Check out our Tax & Trust guide HERE
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Ray Best
Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.
