Trusts can be really useful for many people in all different circumstances, from putting a few pounds away for a child to managing multi-million pound property portfolios. Anna Sidat explores a few scenarios in which a Trust may be useful and how it can help to achieve your financial goals.
What is a Trust?
It’s probably best to start with the basics. A Trust is just a way to manage assets for people. This may be money, investments or land. The people who put assets into the Trust are known as “Settlors”, and they appoint “Trustees” to manage the Trust for them (which may even be themselves). The “Beneficiaries” are the people that will benefit from the Trust and receive the assets.
Let’s take a simple example to explain this – imagine you are a grandparent who wants to give some of your money to your grandchild for when they go to university. You’re worried about inheritance tax, so you’d like to give them the money as a gift but you want to retain control over it until they reach a suitable age - to make sure they don’t squander it!
To do this, you decide to place some money into a Trust. You would be the “Settlor” and you could make yourself a “Trustee”, perhaps alongside another member of your family. The “Beneficiary” would be your grandchild. The “Trustees” would then be able to manage the Trust assets on behalf of your grandchild until the money can be given to them.
When you set up the Trust you can specify how and when the money is to be used. For example, you might add a clause giving the child access to the money at a certain age, say, 18 or 25. Or you might restrict the use of the money in some way, for example by requiring the money to be spent only on education costs. Alternatively, you could leave these things to the discretion of the Trustees so they could decide when is the best time to release funds based on the circumstances at the time.
Avoiding Inheritance Tax
Another common use of trusts is to keep assets within the family that might otherwise be subject to inheritance tax. Let’s say that you own a number of investment properties. If you retain the ownership of them they will be taxed as part of your estate when you die, meaning that up to 40% of their value might need to be paid in tax. By transferring them into a Trust for the benefit of your family, they are removed from your estate and, provided that you live for at least 7 years after making the transfer, they won’t be subject to inheritance tax when you die.
There are ongoing taxes on property held in trust in this way, so you need to make sure you set up the Trust correctly and get good advice, but if you are concerned about preserving your legacy for your family you should definitely explore this option.
Other reasons that you may wish to set up a Trust
There are many reasons why a Trust might be suitable for you. Some of them include;
· To control and protect your family’s assets, during your lifetime and beyond
· To manage money for a member of your family who is too young to manage their affairs
· To manage money for someone who is incapacitated
· To make sure that assets go to the family member you choose – for instance, if you are worried about a family member getting divorced
· To pass on assets while you are still alive and to see the benefit of doing so – for example, to give your family members a sum of money each year from the Trust
· To save inheritance tax
Types of Trust
There are two main types of Trust, a Bare Trust and a Discretionary Trust.
A Bare Trust is less flexible as the “Beneficiaries” cannot be changed. It can be useful for saving tax if you have a child or grandchild without any earnings. If you open a savings account for a child under 18 then you have effectively created a ‘Bare Trust’ for them.
A Discretionary Trust is much more flexible as the “Beneficiaries” can be changed. You can also control how much, and when, they receive the assets and give a wide range of powers to the Trustees to decide when to release money, to whom, and for what purpose. You can give them the ability to lend, borrow or advance capital, and to invest in a wide range of assets.
Advantages of a Trust
Why would you want to create a Trust? There are many sound reasons for doing so. Money can be held for another person without them having direct control over it, and you can change who you want to receive the money in the future (if it is a Discretionary Trust). It can be helpful for tax planning, and for some Trusts, you can receive a regular income from it yourself. You can retain control over the way the Trust’s assets are invested and how the money is spent.
Disadvantages of a Trust
There is nothing to prevent you from receiving income or assets from a Trust that you create, but doing so might mean that the Trust is treated as part of your estate when you die, so if saving Inheritance tax is your main concern then once you have put money into a Trust, you usually can’t get it back – it’s basically a gift.
The tax rules around trusts are quite complicated, and you could incur large tax charges if you don’t avoid them with careful planning. It’s an area when you need good advice.
Future legislation could change which may affect the Trust, although it’s unusual for legislation to be retrospective.
There are annual reporting requirements for most types of Trust, so you will need to run it in a business-like manner and probably complete an annual tax return. You’ll need to consider the possible running costs in your decision as to whether to create a Trust.
Trusts are very widely used as a way to protect assets and to save or defer tax charges. They range from simple ‘Bare’ Trusts to complicated planning arrangements designed to make full use of modern tax-planning opportunities.
The type of Trust that is right for you depends on your circumstances and the reason that you are looking to put money into a Trust. This decision can make a large difference to your family’s future wealth, and so it’s important that you consider all of the advantages and disadvantages of each Trust before making a decision.
Either way, if you think that a Trust might be for you, it’s an option well worth exploring.
Anna Sidat APFS, EFP™, BSc(Hons), Chartered Financial Planner
Woodgate Financial Planning, an appointed representative of Chesterton House
If you have any questions about Trusts and whether they are suitable for your circumstances, please get in touch with one of our Financial Planners and we’ll be happy to help answer your queries.