Setting up a trust

Posted on September 4, 2017 by - Uncategorized

Reduce how much IHT your estate will have to pay on your death

The structures into which you can transfer your assets can have lasting consequences for you and your family, and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits. A trust can be used to reduce how much Inheritance Tax your estate will have to pay on your death.

Legal arrangement

A trust, in principle, is a very simple concept. It is a legal arrangement where the ownership of someone’s assets (such as property, shares or cash) is transferred to someone else (usually a small group of people or a trust company) to manage and use to benefit a third person (or group of people). Broadly speaking, there are three types of trust to choose from: a Discretionary Trust, Life Interest Trust and Bare Trust. An appropriate trust can be used to reduce how much Inheritance Tax your estate will have to pay on your death.

Bare (Absolute) Trusts

The beneficiaries are entitled to a specific share of the trust, which can’t be changed once the trust has been established. The settlor (the person who puts the assets in trust) decides on the beneficiaries and shares at outset. This is a simple and straightforward trust – the trustees invest the trust fund for the beneficiaries but don’t have the power to change the beneficiaries interests decided on by the settlor at outset. This trust offers the potential Income and Capital Gains Tax benefits, particularly for minor beneficiaries. For minor beneficiaries, if funds are provided by the parents, the income can be taxed on the parents if it exceeds £100pa (parental settlement rules).

Life Interest Trusts

Typically, one beneficiary will be entitled to the income from the trust fund whilst alive, with capital going to another (or other beneficiaries) on that beneficiary’s death. This is often used in Will planning to provide security for a surviving spouse, with the capital preserved for children. This can also be used to pass income from an asset onto a beneficiary without losing control of the capital. This can be particularly attractive in second marriage situations when the children are from an earlier marriage.

Discretionary (Flexible) Trusts

The settlor decides who can potentially benefit from the trust, but the trustees are then able to use their discretion to determine who, when and in what amounts beneficiaries do actually benefit. This provides maximum flexibility compared to the other trust types and for this reason is often referred to as a ‘Flexible Trust’.

TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. THE INFORMATION GIVEN IS NOT INTENDED TO PROVIDE LEGAL, TAX OR FINANCIAL ADVICE.