Trusts can be a useful way to protect assets and mitigate tax, but there is often a lot of confusion and misunderstanding about the purposes of Trusts. Our Wills, Trusts, and Probate team have identified some of the main reasons for creating a Trust below.
Firstly, a Trust is a separate legal entity (like a company) which usually involves several roles. The “Settlor” is the person who sets up the Trust and gives the assets away. The “Trustees” are the legal owners who manage and administer the Trust per its terms, which are usually set out in a Trust Deed. The “Beneficiaries” are the people who will benefit from the Trust.
There are many different types of Trusts, and the most appropriate Trust will depend on what you want the Trust for and will often be determined by the Beneficiaries circumstances or tax.
For more information regarding the different types of Trusts, please refer to our blog.
1. Asset Protection
The main reason for creating a Trust is to protect assets. Rather than giving assets or funds to an intended Beneficiary or Beneficiaries outright, it is often better to place the funds into Trust in the event of a change of circumstances for that individual.
If an intended Beneficiary later goes through a divorce or bankruptcy, the assets or funds do not automatically form part of their estate for assessment.
Similarly, if an intended Beneficiary is entitled to means-tested benefits, you can use a Trust to benefit the Beneficiary without losing their means-tested benefits.
Trusts can be used to help protect against care fees, but the local authorities do have special powers to set aside Trusts created primarily to avoid care fees, so you should seek legal advice before creating any such Trust.
2. Tax Planning
Any assets you transfer to a Trust will fall out of your estate for tax purposes if you survive seven years.
The added advantage is that even though you give assets away, you can still retain control by naming yourself a Trustee.
There are tax thresholds and tax reliefs that apply to Trusts, so you should seek legal advice before creating a Trust to avoid inadvertently triggering a tax liability on creation.
3. Family Wealth Planning
A Trust allows you to pass assets down your family’s generations without creating an inheritance tax liability in your own children’s estates.
If you give your children assets outright, you might also be giving them an inheritance tax liability.
A Trust allows you to retain assets for children or grandchildren if it would be more tax efficient to pass them to grandchildren when they are older without the assets passing via your children’s estate for tax purposes.
4. Managing Assets and Flexibility
A Trust allows you to retain control over how the assets are managed as you can be a Trustee.
You can include a list of potential Beneficiaries so that no one has an automatic right to any assets.
Instead, the Trustees decide when and how to distribute assets between the potential Beneficiaries depending on circumstances.
5. May avoid having to obtain a Grant of Probate
The Trustees legally own assets held in Trust, and therefore the Settlor does not own the asset once it has been transferred into Trust (unless they are also a Trustee).
Those assets will not form part of the Settlor’s estate for distribution purposes, and therefore a Grant of Probate will not be required to deal with that asset.
It may be tempting to transfer everything into Trust, but looking at the reasons and tax consequences before doing so is important.
Useful information to have when considering setting up a Trust:
- Details of any gifts made or Trusts set up within the last seven years;
- Details of the assets and liabilities in your estate and their values;
- Details of the financial/personal circumstances of the intended beneficiaries (to include health and their ability to manage funds, finance to include their tax rates and whether they are in receipt of means-tested benefits etc.);
- Details of what you intend to gift into Trust and their values; and
- Details of the contents of your Will and how the gift into Trust might affect the existing plan/structure.