A trust can be a very useful tool to assist with tax planning and asset protection.
Sometimes known as a trust fund, it is a legal arrangement where assets are placed into the care of an individual who manages them for the benefit of another person, who can then take legal control of the assets in the future.
The benefit of this for the person who gives the asset is that they effectively relinquish their ownership of it, meaning the asset can be given as a gift, long before it reaches the intended recipient.
Trusts can serve a wide range of purposes. One of the most common reasons for creating a trust is to reduce a person’s estate so as to reduce their inheritance tax (IHT) liabilities in the future. However, they can also be suitable for ensuring provision for minors upon the death of a parent, as well as for vulnerable people or people with disabilities.
Trusts are a useful method of passing assets onto the next, or future, generations, as well as passing assets on while maintaining a level of control over them. Trusts can also be used to protect assets from, for example, divorce settlements, and they can pay for private school or university fees.
People are often cautious about creating a trust because they believe that once an asset is in a trust, it is there for life. However, this isn’t necessarily the case.
The most important point to remember is that, once you have settled an asset into a trust, you can (generally) have no enjoyment of that asset in the future. If you do, then you are deemed to not have made the gift.
Careful thought needs to be given as to the amount that you can afford to put into a trust, because, while you may wish to minimise the potential IHT liability for your estate, you do need to retain sufficient funds to cover your future needs.
There are three main types of trust that can be established under current legislation. These are:
These provide the most flexibility, as the trustees (who have effective control over the assets), have complete discretion as to whether an income of capital is paid out to the trust’s beneficiaries. However, with complete discretion comes a potentially more penal tax regime.
Immediate Post-Death Interest in Possession (IPDI) trusts
An IPDI trust is created from a Will and is often used on the first death between a married couple, for example. Older trusts may have been created as an Interest in Possession (IIP) arrangement and these operate in a similar way to an IPDI for income tax purposes, although the two differ when it comes to IHT.
A bare trust is typically used where an asset is to be held for a minor. Generally speaking, the asset will then pass to them absolutely when they turn 18. While this is the cheapest form of trust from a professional fees perspective, the trustees need to decide whether it is appropriate for the beneficiaries to have the capital on their 18th birthday or if it would be better to have further controls in place.
Before you establish a trust, it is very important that you consider the structure you need, taking care to evaluate each option and being mindful of your current and future needs, as well as those of your intended beneficiaries.
We can discuss the different structures with you and help identify the best option for you and your beneficiaries.
A trustee manages a trust on behalf of the settlor and the beneficiary.
Generally, it is recommended that a trust has two trustees as a minimum. However, it is often favourable to have an odd number of trustees in case a deciding vote is needed. The trustees can often include professional trustees such as accountants or solicitors.
Trustees have a fiduciary duty to act in the best interests of the beneficiaries as a whole, and this may mean acting against their wishes. If a trustee is in breach of these fiduciary duties, they can, in theory, be sued by the beneficiaries.
Our team can give you guidance on the duties of a trustee and can advise on who should or should not be appointed as a trustee. We can also talk you through your options if you have been appointed as a trustee and you wish to no longer have this responsibility.
A beneficiary is a party that benefits from the assets in the trust.
For a discretionary/IPDI trust, the beneficiary is usually, but not exclusively, a family member or multiple family members.
Beneficiaries are typically classed as primary, secondary, or tertiary beneficiaries, and so on, but there will need to be an ultimate beneficiary who will take absolute ownership of the assets, usually at the end of the trust period.
There are some important things to consider when deciding your beneficiaries. For example, you should decide whether to include everyone you intend to benefit from the trust or just certain individuals. You may also have questions about how you can add or remove beneficiaries and we can help you with these issues.
For a discretionary trust, it is usually a requirement that the settlor (who places the assets in the trust) and their spouse are precluded from being beneficiaries of the trust. This is to ensure that the IHT advantages of settling capital into the trust are not forfeited.
A settlor will also often include a Letter of Wishes with the trust deed, setting out their aims as to how the trust should be administered, and their preference as to how beneficiaries are treated. However, this letter is only guidance and, if the trustees see fit, they can ignore it. If this is a concern for the settlor, they will need to ensure that the trust deed is drawn up in such a way that certain wishes will be met.
Trusts can be a very useful and practical tool for passing on assets to future generations, ensuring provision for children in the event of a parent’s death, protecting money for future school or university fees, and protecting wealth or assets from divorce or IHT. While there are many important elements to consider, our team at Duncan & Toplis are able to help make the creation, management, and execution of a trust as straightforward as possible.
If you would like more information, support, or guidance, please contact our team.