Preserving your assets for the next generation using a Trust

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A trust is a way of managing assets such as money, investments, land or buildings for other people. Each type of trust is taxed differently, affecting liabilities such as Income Tax (IT), Capital Gains Tax (CGT) or Inheritance Tax (IHT). Our trust and tax planning specialist Ian Naylor explains how they can be used to ensure how assets are passed from one generation to another.

 You can create a Trust during your lifetime, or through your will, and there are different types of Trusts, namely:

Life Interest Trusts

Discretionary Trusts

Bare Trusts

Disabled Trusts

Why create a Trust?

• To protect assets. The settlors (the person choosing to make the Trust) may want to ensure their assets are kept safe and not lost through divorce or poor management/decision making by the beneficiary.
• To protect assets from taxes and other costs, as Trusts are used to minimise tax liabilities, IHT in particular.
• Control – a trust allows a settlor to secure their assets for a beneficiary but still retain control over it.
• Flexibility – a Trust allows a settlor to respond to changing circumstances and needs within their family.

Families who run a farm can use Trusts to protect their business, so that in the event of divorce they prevent the farm being broken up which could threaten its future viability.

The other common scenario where Trusts are used is in cases where a spouse wishes to ensure that on their death, should their spouse remarry and pass away, their new spouse is unable to disinherit any children.

How is it different from a Will?

A Trust is a legal arrangement that allows assets such as property to be looked after for the beneficiaries in your Will. Assets are looked after by a third party, known as the ‘Trustee’, to avoid anything passing to someone you don’t want to inherit.

In a will you can name who are beneficiaries but in a discretionary trust you can name various beneficiaries like someone’s children and the trustees can decide how any particular individual will benefit from the Trust.

Trusts are rarely challenged whereas this can happen with wills.

What if a Trust conflicts with a Pre-Nuptial agreement?

Currently pre-nuptial agreements are not formally binding in an English court, so the type of order a court can make would depend on what type of Trust is in question, though normally a Trust/Will would continue to apply.

The different types of Trusts

Life Interest Trusts

Also known as an interest in possession trust – offer a method of protection for your property and other financial assets. It can be included in your will.

It will usually provide that someone is entitled to occupy a property for life or to be paid income from investments for life. When the life tenant dies the assets will pass to the beneficiary stated in the will.

Funds contained within the trust cannot usually be considered during a financial assessment should the survivor require care in the future.  However, you should always take professional advice in these circumstances.

A Discretionary Trust

These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital. They are the most common type of Trust used in tax planning thanks to their flexibility, and are also set up in cases where there may be a future need – such as a grandchild who may need more help than other beneficiaries at some point in their life, or where the beneficiary would struggle to deal with money themselves.

Depending on the trust deed, trustees can decide:

• What gets paid out (income or capital)
• Which beneficiary to make payments to
• How often payments are made

The Trust usually allows both the income and capital to be distributed at the trustees’ discretion, or the trust income can be accumulated within the trust.

In IHT planning the lifetime nil rate band, currently £325,000, can be settled on Trust without a lifetime inheritance tax charge. Also, assets that qualify for 100% business or agricultural property relief can usually be settled on Trust without a lifetime inheritance tax charge.

Bare Trusts

Bare Trusts are where the assets in a Trust are held in the name of a trustee but go directly to the beneficiary, who has a right to both the assets and the income of the trust. These are usually used in cases where assets are being transferred to a minor.

Transfers into a bare trust may also be exempt from Inheritance Tax, if the person making the transfer survives for seven years after making the transfer. The beneficiary is responsible for declaring any chargeable gains on their personal Self-Assessment tax return.

Disabled Trusts/Trust for Vulnerable Beneficiaries

Not as frequent, but these are used in cases where disabled or vulnerable people are involved, which is defined as:

• A person who is mentally or physically disabled
• Someone under 18 who has lost a parent through death

There are income tax, capital gains tax and inheritance tax advantages for qualifying trusts for vulnerable beneficiaries. You do not have to pay Inheritance Tax on the transfer of assets into a Trust for a disabled person if the person making the transfer survives for 7 years after making the transfer.

Creating a Trust

Before you begin the legal process sit down and plan out what you want to put into Trust, such as cash, investments, property etc. then who the beneficiaries are going to be.

You will also need to put some thought into who you wish to appoint as your Trustee, woh are commonly a friend or a professional advisor like an accountant or a solicitor, which can be beneficial as they are impartial.

Because of the potential pitfalls regarding tax and Trusts, it makes financial sense to take professional legal advice at this stage to draw up your Trust. The cost of this process will vary depending on the amount and value of the assets you wish to place within it and its complexity.

For more information about how you can protect your assets and effective tax planning of your estate contact Ian Naylor on 01538 399199 or email icn@bowcockpursaill.co.uk