What is a trust?
You may want to consider putting some of your assets into a trust for a loved one. Trusts are a way of managing wealth, money, investments, land or property, for you, your family or anyone else you’d like to benefit.
Bare Trusts are also known as ‘Absolute’ or ‘Fixed Interest Trusts’, and there can be subtle differences.
The settlor – the person creating the trust – makes a gift into the trust which is held for the benefit of a specified beneficiary. If the trust is for more than one beneficiary, each person’s share of the trust fund must be specified. 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. As long as the settlor survives for seven years from the date of the gift, it falls outside their estate.
The trust fund falls into the beneficiary’s Inheritance Tax estate from the date of the initial gift. With Loan Trusts, there isn’t any initial gift – the trust is created with a loan instead. And with Discounted
Gift plans, as long as the settlor is fully underwritten at the outset, the value of the initial gift is reduced by the value of the settlor’s retained rights.
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.
It’s possible to use any available annual exemptions. If the total non-exempt amount gifted is greater than the settlor’s available ‘nil-rate band’ (NRB), there’s an immediate Inheritance Tax charge at the 20% lifetime rate – or effectively 25% if the settlor pays the tax.
Flexible Trusts with default beneficiaries
Flexible Trusts are similar to a fully Discretionary Trust, except that alongside a wide class of potential beneficiaries, there must be at least one named default beneficiary. Flexible Trusts with default beneficiaries set up in the settlor’s lifetime from 22 March 2006 onwards are treated in exactly the same way as Discretionary Trusts for Inheritance Tax purposes.
Different Inheritance Tax rules apply to older Trusts set up by 21 March 2006 that meet specified criteria and some Will Trusts. All post-21 March 2006 lifetime trusts of this type are taxed in the same way as fully Discretionary Trusts for Inheritance Tax and Capital Gains Tax purposes.
These trusts are often used for family protection policies with critical illness or terminal illness benefits in addition to life cover. Split Trusts can be Bare Trusts, Discretionary Trusts or Flexible Trusts with default beneficiaries. When using this type of trust, the settlor/ life assured carves out the right to receive any critical illness or terminal illness benefit from the outset, so there aren’t any gift with reservation issues.
In the event of a claim, the provider normally pays any policy benefits to the trustees, who must then pay any carved-out entitlements to the life assured and use any other proceeds to benefit the trust beneficiaries.
Property Protection Will Trust
This is a type of Life Interest Trust and is incorporated into a Will for couples who jointly own the family home.
You can protect at least half of the value of the property by having it ring fenced in a trust so you can pass it onto your children or chosen beneficiaries when you pass away, whilst at the same time protecting the surviving partner’s lifetime interest in the property.
Right of Residence Trust (ROR)
This a form of Immediate Post-Death Interest Trust incorporated into a Will. This trust allows you to give a chosen beneficiary a right to reside in a specified property either for their lifetime or for a specific time period.
Start your estate planning journey
Estate preservation and the transferring of wealth has become an important issue for many families today. We all have different objectives in life and need different strategies to help achieve them. That’s why carefully planning the financial affairs of your estate is essential to ensure that you can pass on the maximum benefit to your beneficiaries, which can have a significant impact on your loved ones’ futures.
Contact us to discuss how our Inheritance Tax planning services can help you start your estate planning journey.