Leaving money and assets to beneficiaries in your Will may seem cut and dried.
- You say who gets how much
- When you die, they get what you stipulate
However, in practice it isn’t always that straightforward.
- Those who may need the money quickly will have to wait until after probate
- Probate might be delayed if the Will is contested
- Your wishes may not be clear enough
What do Trusts do?
Trusts are designed to ensure your loved ones are properly looked after the way you want, giving you control beyond the grave. You create a Trust that will be administered by people you appoint at trustees. Trustees are legally obliged to protect your assets and distribute your estate in a particular.
A Trust can protect a wide range of assets including:
- Investments
- Money
- Property and land
- Antiques, family heirlooms, art, etc
These can be held for a spouse, children or indeed anyone you wish.
Why set up a Trust?
A Trust separates out assets from your main estate. Depending on the type of trust and when it is set up, assets can be ring-fenced in a Trust and will not be included in calculations of your net worth for tax, care fees assessments, divorce settlement or claims by creditors. That’s why trustees can release funds almost immediately after your death as they do not have to wait until after probate.
How Trusts work
When you create a Trust, one or more people act as trustees to look after your property and assets on behalf of one or more people, known as the Beneficiaries.
If there is a Trust in your Will, your trustees will manage the asset of that Trust for as long as that Trust lasts. Being a trustee is a big responsibility as they have a legal duty to manage the Trust for the benefit of the beneficiaries and act in their best interests.
As the Co-op legal services website says:
“Trustees should be trustworthy, financially responsible and have good administrative skills. It’s important to talk to someone you’re considering as a Trustee before you appoint them.”
That’s why you could consider appointing a professional trustee - download our free Guide on this here.
Types of Trust
OK, we’re going to get a little technical here, so three caveats first!
1. Make sure you understand both the risks and benefits of Trusts - download our free guide here.
2. Always seek professional financial advice before setting up any Trusts in your Will. Trusts can be a useful tool to manage your estate’s IHT tax liability, but like all things IHT, the rules can and do change.
3. Use a professional Will writer to draw up any Will containing Trusts, to ensure the wording and details are correctly written.
In this article, we’ll cover two types of Trusts - Bare and Discretionary.
Bare Trust
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Also known as ‘Absolute’ or ‘Fixed Interest Trusts’, a Bare Trust is held for the benefit of a specified beneficiary.
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The settlor – the person creating the Trust – makes a gift into the Trust.
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If the Trust is for more than one beneficiary, each person’s share of the trust fund must be specified.
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For lump sum investments, after allowing for any available annual exemptions, the balance of the gift is a potentially exempt transfer for Inheritance Tax purposes.
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As long as the settlor survives for seven years from the date of the gift, it falls outside their estate.
Bare Trusts income exemptions
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When family protection policies are set up in Bare Trusts, regular premiums are usually exempt transfers for Inheritance Tax purposes.
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Any premiums that are non-exempt transfers into the Trust are potentially exempt transfers.
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Special valuation rules apply when existing life policies are assigned into family Trusts.
With a Bare Trust, there are no ongoing Inheritance Tax reporting requirements and no further Inheritance Tax implications. Where the Trust holds a lump sum investment, the tax on any income and gains usually falls on the beneficiaries.
Bare Trusts post 18
Bare Trust administration is relatively straightforward even for lump sum investments. Where relevant, the trustees simply need to choose appropriate investments and review these regularly.
With a Bare Trust, the trustees look after the Trust property for the known beneficiaries, who become absolutely entitled to it at age 18 (age 16 in Scotland).
Once a gift is made or a Protection Trust set up, the beneficiaries can’t be changed, and money can’t be withheld from them beyond the age of entitlement. Bare Trusts may therefore be inappropriate if you’d prefer to retain a greater degree of control.
Discretionary Trusts
With a Discretionary Trust, the settlor makes a gift into Trust, and the trustees hold the Trust fund for a wide class of potential beneficiaries. This is known as ‘settled’ or ‘relevant’ property. For lump sum investments, the initial gift is a chargeable lifetime transfer for Inheritance Tax purposes.
With a Discretionary Trust, it’s possible to use any of your available annual exemptions. If the total non-exempt amount gifted is greater than the settlor’s available nil-rate band, there’s an immediate Inheritance Tax charge at the 20% lifetime rate – or effectively 25% if the settlor pays the tax.
Family protection
When family protection policies are set up in Discretionary Trusts, regular premiums are usually exempt transfers for Inheritance Tax purposes. Any premiums that are non-exempt transfers into the trust will be chargeable lifetime transfers. Special valuation rules for existing policies assigned into Trust apply.
Periodic and exit charges
As well as the potential for an immediate Inheritance Tax charge on the creation of the Trust, there are two other points at which Inheritance Tax charges will apply. These are known as ‘periodic charges’ and ‘exit charges.
The calculations can be complex but are a maximum of 6% of the value of the Trust fund. In many cases, they’ll be considerably less than this.
Even where there is little or, in some circumstances, no tax to pay, the trustees still need to submit an IHT return to HMRC. Under current legislation, HMRC will do any calculations required on request.
Investments and Discretionary Trusts
Where Discretionary Trusts hold investments, the tax on income and gains can also be complex, particularly where income producing assets are used. Consult your financial advisor for expert advice on the suitability of Discretionary Trusts. Panthera Estate Planning as a company cannot offer financial advice, but Paul Hammond can in a personal capacity as a regulated financial advisor.
Setting out your wishes
As the settlor, you can provide your trustees with a letter of wishes identifying who you would like to benefit and when. The letter isn’t legally binding but can give your trustees clear guidance, which can be amended if circumstances change.
Discretionary Trusts post 18
Many people who create a Discretionary Trust feel they’d prefer to pass funds down the generations when the beneficiaries are slightly older than age 18. This also provides greater protection from third parties, for example, in the event of a potential beneficiary’s divorce or bankruptcy.
Other types of Trust
Contact us to discuss the principals behind and potential benefits of:
- Loan Trusts
- Gift Trusts
- Split Trusts
Or check out our downloadable Guides to Trusts from this page:
- The Benefits of Trusts and the use of Loans
- Why should I use a Professional Trustee?
- The Importance of Trustee meetings
- Can Trusts eliminate the Tax I pay?
- Guide to Estate and Trust Planning code
Panthera Estate Planning
Protecting your hard-earned assets