How do trusts work?
A trust enables a person (the ‘settlor’) to give assets to another party (the ‘trustee’) to look after, to benefit of one or more persons (the ‘beneficiaries’) in the future. The settlor can appoint several trustees or just one. They can include themselves.
There can also be more than one beneficiary. They could receive an income from a business being held in the trust. They could receive capital which could be in the form of cash or shares. Or, they could receive both income and capital from the trust. Some beneficiaries may not benefit at all.
When setting up the terms of a trust (the ‘trust deed’), the settlor can choose to keep control of certain assets themselves and to give the beneficiaries have a right to others. To maximise inheritance tax effectiveness, the settlor should not be a beneficiary and neither should their spouse or civil partner while the settlor is alive
How much can I place in trust?
You can place any value of assets in trust but if the value exceeds your nil rate inheritance tax band (currently £325,000) you may have to pay IHT at a rate of 20% on the amount over that £325,000. You can make regular contributions into the trusts well as one off lump sums. Any Inheritance tax and/or capital gains tax you have to pay will depend on the type of trust you have, what you contribute and its value.
Can trusts avoid inheritance tax?
If the trust you use is effective for inheritance tax purposes and certain criteria are met, there is a chance inheritance can be avoided or reduced.
Inheritance tax should be reduced if you place assets into a trust and then live for seven years or more after it was made. After the seven years the sum total of the assets gifted is not liable for IHT and no longer counts towards the value of your estate. The lower the value of your estate, the lower the potential inheritance tax bill. If you have a life insurance policy which pays out in the event of your death IHT can be avoided. If the policy is put into a trust, when you die, the proceeds will pay out to the trust instead of your estate.
Tax rules change regularly so having a financial planner to take care of your trusts will be beneficial.
Can trusts help protect my assets?
Many trusts can be used for asset protection purposes. Some people have beneficiaries who might not be in a position to handle valuable assets, maybe because they are children or vulnerable in other ways. Also, big life changes such as a divorce or bankruptcy can render assets at risk. In these circumstances a trust can help.
If your trustees are in a position to decide which of the potential beneficiaries should benefit, when and with how much, then the assets held in the trust should be safe from claims on matrimonial disputes, more so than if you handed any assets over outright.
How do I set up a trust?
You should seek advice from a specialist. There are various types of trusts which alll have different tax allowances. Plus your trust should be tailored to match your aims and objectives. It also depends on what you intend to put into the trust, what the tax consequences would be and who you name as the beneficiaries and trustees.
Can a beneficiary also be a trustee?
Yes: although appointing a beneficiary as a trustee could create a conflict of interest if that person was thought to be using their position to influence the other trustees for their own gain. It is advisable that the two roles don’t mix or at the very least a solicitor is appointed appointed as well, to provide independent and impartial advice.
Can a trustee be held responsible for any mistakes?
Yes. Anyone acting as a trustee needs to be mindful of the risk they are taking on. If a trustee does something other than perform the duties specified in the trust deed, then they can be held liable for any loss or damages suffered as a result. Trustees, especially those of family trusts, should seek professional advice in order to fully understand their obligations and to ensure that they manage the trust fund properly and protect themselves from personal liability.