Trusts provide a method of protection for assets by keeping them separate from the person that has ‘settled’ them. This means that they will no longer belong to the original owner (settlor) and will be owned by the trust. As such, trusts are an effective vehicle for protection of assets if there is a foreseeable deterioration of an individual’s asset base. For example, tax payable due on death of the original owner of the assets.
They can also be useful to ensure that a benefactor’s wishes are enacted, by appointing trustees to oversee the use of the assets. For example, providing an income for a beneficiary after they reach the age of 18.
There are numerous types of trust such as Bare or Absolute trusts, and Discretionary trusts, some details of which are simply explained below.
- Bare/Absolute Trust – This is where the beneficiary is absolutely entitled to the trust proceeds and once the assets have been placed into the trust, i.e. they effectively belong to the beneficiary. These are considered potentially exempt from IHT. This means that if the settlor survives for 7 years after the trust has been set up, there will be no IHT to pay. The drawback of this type of trust is a lack of flexibility. The beneficiary cannot be changed and the beneficiary can access the entire capital at the age of 18 and use it as they wish, which may not be the intention of the original owner.
- Discretionary Trust – This type of trust is very common for families where the settlor can name a group of potential beneficiaries such as ‘all of my children and grandchildren’ and give the trustees the power to provide any capital or income to the beneficiaries as required. The naming convention allows for changes in the beneficiaries based on births of new family members or if a beneficiary is divorced and then remarries. A drawback of this is that the beneficiaries are not absolutely entitled to the proceeds and payments are at the full discretion of the trustee.
Trust and Inheritance Tax
Trusts can be extremely useful for individuals wanting to maximise potential benefits for those they are paid out to. This is particularly apparent when looking at life insurance policies.
For example, when a life insurance policy is paid out and becomes part of the deceased individuals estate, it may be likely to create or increase an inheritance tax (IHT) liability. IHT is currently payable on assets over £325,000 and levied at a rate of 40%.
Within a trust the insurance is paid out and not included as part of the estate. Instead it can be passed directly to the intended beneficiaries as stated in the ‘trust deed’ (which essentially details the intention of the trust) and will not be subject to IHT.
If you would like to see how a Trust could benefit you, speak to one of our advisers today.