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Typical use of trusts is for the protection of money, investments, property and land. Trusts can help to cascade wealth through the generations and are particularly useful when beneficiaries are unable to manage their own finances. Also, with the judicious use of loans rather than outright distributions, trustees can help beneficiaries to protect their inheritance from divorce or bankruptcy.
Trusts
A trust is a way of managing an asset for people. There are several different types of trust, all serving different purposes.
Considerations for a trust
In order to know whether a trust is right for your objectives, it’s a good idea to consult an expert as there may be more efficient or cheaper ways to achieve your objectives. Common objectives include:
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Holding assets for later
Holding assets until someone is an appropriate age to utilise them. A typical example might be money left to a grandchild in a will, but they’re only 10 years old and it would be better to wait until they’re 21 or older, for example.
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Incapacity
If someone becomes incapacitated and cannot handle their own affairs. For example, someone involved in an accident who is awarded a lump sum in compensation
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To protect a family asset
For example, someone gets married and they want to live in a family property but the family want to limit that person's spouse from legally owning it
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Care fees planning
To move 50% of the share of a home on death into a trust which can be useful when determining the cost of future care home fees for the surviving spouse
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Saving Inheritance Tax (IHT)
Some specialist trusts help to reduce the potential IHT on death whilst still allowing some access to the funds by way of limited regular or ad hoc withdrawals.
If you do decide to establish a trust, you’ll need people to fill different roles. You’ll need a settlor, so the person who puts assets in a trust – in this instance, probably you.
You’ll need trustees who decide how to maintain or distribute the assets in the trust. They’re also responsible for paying any appropriate tax.
Finally, beneficiaries, who could include a group of people, or a family. They will benefit from the terms of the trust but also be limited to them.
Trusts and financial planning
Trusts and financial planning go hand in hand. In some of the examples above, there are often cases where financial planning advice can result in a trust being created.
It is logical to arrange financial planning help before creating a trust, even if you think that’s the solution you want. There are allowances and exceptions to consider for assets that might mean a trust isn’t necessary and a financial planner can recommend the right approach for you once all the assets have been collated and objectives agreed.
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Trusts and capital gains tax (CGT)
The rules around CGT and trusts are complicated. Placing an asset in trust may not remove the liability to pay CGT when assets are transferred to the trust by the settlor.
There are additional complexities around whether the recipient is non-UK based and there are numerous allowable costs and tax relief instances available, so while there are opportunities, there are pitfalls in equal numbers!
Getting professional help
Trusts can have many benefits but it is a complex area of law and recent changes to require all trusts to be registered with HMRC increasing the burden on trustees.
It is best to receive professional advice prior to creating a trust to make sure you’re aware of your responsibilities. Wren Sterling works with a number of specialists who can ensure the right legal and taxation advice is available.