Chances are, you might have thought that later life planning started and ended with a Will. However, trusts are robust legal arrangements that can provide many future benefits for you and your loved ones.
How Does a Trust Work?
A trust is a legal arrangement that allows you to give money, property, or other assets to someone else for them to look after, often for the benefit of a third party. Once you place assets within a trust, they do not belong to you, and when you pass away, they will not be included in your estate when calculating Inheritance Tax (IHT).
When establishing a trust, you must appoint trustees to manage the assets you place within it. Trustees become the legal owners of the assets and have the same powers a person would have to buy, sell, or invest. They have a big responsibility to manage the trust responsibly. They must review investments regularly and make payments from the trust to the beneficiary as per your instructions.
When creating a trust, you then choose beneficiaries who will benefit from the trust in the future. They may receive the income of a trust, such as the rent from a house, the capital, or both.
When establishing a trust, you must decide whether it comes into effect immediately or after you pass away. Both can have advantages depending on your requirements or needs – for example, if you place your home in trust for it to come into effect immediately, it can potentially lower high care fees in the future as it will not be classed as part of your estate.
Why Use a Trust?
There are many reasons that you may consider a trust in your estate plan:
- To hold assets for vulnerable beneficiaries – for young or vulnerable beneficiaries, a trust holds any assets until they are old enough to take possession. You can specify when your beneficiaries can access what is in the trust, whether when they are a certain age or meet certain conditions.
- Reduce IHT – one of a trust’s main benefits is that it can reduce the overall amount of IHT due on your estate. IHT is charged at a rate of 40% on the value of your estate over £325,000 (or £500,000 if you use the residence nil rate band and leave your house to your children or grandchildren). However, if you place assets in a trust and put it in the care of your trustees, those assets no longer belong to you and cannot be counted. Therefore, you can reduce the amount of IHT payable and pass on more of your assets to your loved ones.
- Mitigating high care fees – if you need care in the future, you may have to sell your home and other assets to afford it. However, as the assets are no longer yours when you place them in a trust, the authorities cannot include them when assessing your means. Doing this deliberately is known as deliberate deprivation of assets, and the authorities can contest this, but it is a highly beneficial extra boon.
- Avoiding probate – probate is the process an estate must pass through before anything can be distributed to the beneficiaries. It can be expensive, time-consuming, and complex, but having a trust can help. Trusts allow beneficiaries to inherit immediately rather than waiting for several months (or years in some cases!).
Another key benefit of a trust is that it provides you more control over where your assets go after you pass away. Even with a Will in place, it is possible that your partner may remarry and your children are accidentally disinherited or that your child divorces and their ex-partner receives half of the assets you leave them. Trusts give your assets an extra layer of protection and can help stop both scenarios from happening.
Trusts and Tax
A common misconception that trusts avoid all forms of tax; however, this is a myth. Although they can reduce IHT, they are subject to other forms of taxation.
Tax rules that applied to trusts in the past were very favourable, but changes to the rules in 2007 mean that more tax applies to certain kinds. Capital gains tax applies to any gains over the annual allowance, and any income from a trust is liable to income tax.
In some cases, trusts may also need to pay IHT. When establishing a trust, you will normally pay IHT at a 20% rate if it is in excess of the nil rate band, but there are some exceptions, such as if you continue to benefit from the assets when you are still alive. Any assets that remain in a trust are then valued every decade, and a 6% charge is taxed on the value of the total assets. An additional 6% must be paid when the trust is closed or assets are removed. However, these charges only apply to anything over the nil rate band (£325,000). For example, if £400,000 worth of assets is held within a trust, taxation would apply to the £75,000 over the nil rate band.
Trusts can be an incredibly powerful and valuable addition to your estate plan. Whether for reducing IHT, protecting your property, or simply retaining control over where your assets go after you pass away, a trust can meet your needs and help you pass on more to your loved ones.
Contact The Planning Bee today for advice and information on which trust is right for you. Our expert paralegals will help you create the perfect estate plan that ensures your loved ones are taken care of in the future.