Estate planning – Trusts

When we write our Will we usually know who we want to pass our estate to. On a very basic level it’s likely to be our current spouse and our children. In fact, if we died ‘intestate’, without a Will, that’s exactly how the Rules of Intestacy would distribute our estate: currently, the first £250,000 would go to our spouse and the balance would be shared equally between our spouse and our natural or adopted children.

But life isn’t always so simple. Circumstances change and, despite our best intentions when we write our Will, our plans may not always be fulfilled – what we think is a simple, fair and equitable way of distributing our estate may run aground for all sorts of reasons. Moreover, passing our estate to others raises the spectre of Inheritance Tax which, of course, our beneficiaries would very much like to be minimal so they can enjoy the full value of their inheritance.

The use of a trust can successfully address both issues: they ring-fence your assets which ensure your beneficiaries receive what you intend them to receive, and can minimise the effects of tax by effectively removing assets from your estate.

What is a trust?

A trust is a legal contract under which a group of people are given responsibility for administering and managing named assets for the benefit of another group of people. The person creating the trust is known as the ‘settlor’; the people administering the trust are the ‘trustees’ and the person or persons who will eventually benefit from the trust are its ‘beneficiaries’.

Why trusts are used

There are a variety of reasons for creating a trust when making a Will. Most relate to either creating an environment within which the settlor’s Will can be effectively enacted and / or limiting the extent of Inheritance Tax. The three most usual reasons are:

• Holding assets until children reach maturity

Tragically, parents can die whilst their children are young. Putting your estate into trust provides a method of protecting and managing it until your children are legally old enough to take possession. Some, such as accumulation and maintenance trusts (see below), allow the children to receive an income to provide financial support.

• Providing for your spouse and preserving your estate for your children

It’s possible that some of your estate may pass to people you don’t know, most commonly as a result of your spouse inheriting your estate, remarrying and inadvertently letting it be absorbed into the estate of their new family. Typically, an interest in possession trust (see below) will provide your spouse with an income until their death, upon which the assets pass to the children.

• Reducing Inheritance Tax liability

Putting assets into trust can either reduce or even eliminate any Inheritance Tax liability for a particular asset and can help keep the value of the estate within the nil-rate band.

Types of trust

Trusts fall into two broad categories, ‘revocable’ and irrevocable’.

• Revocable trusts

These allow the assets to be returned to the settlor. Despite having few, if any, tax benefits they are useful in some circumstances.

• Irrevocable trusts

These permanently remove specific assets from the settlor’s estate. Doing so offers a number of tax advantages, especially in respect of Inheritance Tax, and gives the beneficiary peace of mind about the eventual outcome of a will. As irrevocable trusts can’t be reversed, entering into one must be a carefully considered decision.

Within these two categories there are a number of different types of trust specifically designed to address different circumstances and needs, the most usual being:

• Bare trust

This is the simplest form of trust. The assets are held in the name of the trustee, but the beneficiary has the right to both the capital and income at any time after the age of majority. Bare trusts are often used to protect assets for children; the assets being held in trust until the children are deemed legally old enough to receive them.

• Interest in possession trust

A trustee holds the assets on behalf of two sets of beneficiaries. Any income arising from the assets held in trust is passed to the first beneficiary but, in the event of their death, the asset itself becomes the property of the second beneficiary. Interest in possession trusts are often used to ensure assets are passed to the ‘correct’ children following the death of a single spouse. For example, the settlor (husband) names his wife as the first beneficiary and their children as the second beneficiaries. The settlor’s wife receives an income from the asset but has no claim on the asset itself. When she eventually dies, their children receive the asset.

• Discretionary trusts

Discretionary trusts give trustees power over how to use the trust income and, sometimes, the capital itself: for example, the trustees can decide what gets paid (capital or income), to which beneficiary and how often. Discretionary trusts are used to provide flexibility in how the assets and income are awarded to the beneficiaries.

• Accumulation and maintenance trusts

Accumulation and maintenance trusts allow income to be accumulated within the trust and allows the trustees to make payments from the trust to the beneficiaries. Such trusts are often used to provide ongoing financial maintenance for surviving members of a family, especially children of school age.

• Settlor-interested trust

Either the settlor or their spouse can benefit from a possession trust, a discretionary trust or an accumulation trust.

• Disabled beneficiary trusts

These are used to hold compensation payments made to those who have become disabled though personal injury. They provide a higher level of tax exemption.

• Protective trusts

These allow the beneficiary to receive income from the trust while the capital remains protected. They are most often used in circumstances where the beneficiaries are bankrupt or likely to become so.

• Mixed trusts

A combination of more than one type of trust. These can be complicated to administer as each trust has to be managed independently but within a ‘portfolio’ of sometimes inter-related trusts. A frequent complication is that different tax rules apply to different types of trust.

• Non-resident trust

This is used where the trustees are not resident in the UK or when the settlor wasn’t resident, ordinarily resident or domiciled in the UK either when the trust was set up or when funds were added. Although there are tax benefits, the tax rules for non-resident trusts are very complicated.

Trustees

Trustees are the people responsible for administering the trust and managing its assets. By definition, they become the legal owners of those assets covered by the trust but must manage them in the best interests of the beneficiaries.

Not surprisingly, the duties and powers of trustees are defined by law and, depending on the type of trust, may mean that trustees have:

• a duty to act in accordance with the rules of the trust
• a statutory duty of care to the trust’s beneficiaries
• the power to make investments for the benefit of the beneficiaries
• a duty to review investments regularly and take expert advice on their management
• a duty to make payments from the trust
• a duty to pass the assets to the beneficiary in accordance with the instructions set out in the trust deeds

Appointing trustees

Trustees are at the heart of any trust so it’s vital they have the capacity to perform the duties expected of them. As the trust you set up will be an integral part of your Will you must appoint and name the trustees of any trust within it. You can appoint up to four trustees per trust but it’s best to appoint at least two. In most cases, you may appoint your executors and if you are also appointing guardians for your children, appointing one as a trustee is beneficial. In selecting trustees, ideally you need someone you know and who is trustworthy, has some experience with financial matters, has the beneficiaries’ best interests at heart and can be reasonably expected to outlive you.

Although the trust can be set up to reimburse the trustees for reasonable expenses, it must be realised that the money used to do so comes from the estate and could, in time, have passed to the beneficiaries. It’s possible to engage professional trustees but, as their fees are also paid from the trust’s funds, this is not a popular option and should only be used as a last resort.

Setting up a trust

Setting up a trust will need the services of a solicitor, and ideally one who specialises in estate planning. Trusts can be complex but, if used judiciously with knowledge and experience, can offer a durable and cost-effective solution to many estate planning problems.

 
How can One Financial Solutions help you?

‘Hope for the best but plan for the worst’ is a common maxim – but many of us just ‘hope for the best’ and then don’t do any planning at all.

One Financial Solutions is here to help you. As a firm of independent financial advisers we can provide impartial advice to help you identify the potential risks you face and develop a strategy that provides protection from their consequences. We’ll recommend the best products from across the whole of the financial services market and help put in place the safeguards you need to protect both you and your dependants.

We can also provide a comprehensive estate planning service to complement the financial advice we give you. Helping you preserve everything you’ve worked so hard to achieve and ensure that it’s passed on to who you want is a natural extension of what we do.

So, if you’re looking for help with any aspect of protecting either yourself or your estate, please call us on 020 3714 9565 or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.