Do You Have Trusts That You Have Forgotten About?

4 minutes reading time

Trusts are very useful legal entities that separate the legal ownership and control of the assets from those who benefit.

There are many types of trust; you may have set one up inadvertently during your lifetime and forgotten all about it.

Recent changes, namely trust registration, mean that whilst trusts are still useful, trust compliance has become more important to avoid penalties and interest for the trust.

The headline figure for the penalty stated on the HMRC website is up to £5,000.

If you are a trustee, the beneficiaries could hold you accountable for breaching your trustees’ duties and any loss arising as a result.

To ensure you avoid these penalties, our Wills, Trusts and Probate Solicitors have put together this guide.

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Do you have trusts you have forgotten about v2

Do you have any of the following trusts?

Trusts that you have set up usually have a name describing the purpose. You can call a trust anything you like, but here are some of the more common names:

Spousal bypass trusts – commonly set up during your lifetime to receive lump sum payments such as a death in service, proceeds of a life policy pay-out or pension. They usually stay dormant until an event triggers the payment into the trust. The funds then “bypass” the surviving spouse and fall into the trust, which they can benefit from as well as children and further descendants without the funds forming part of their estate for Inheritance Tax purposes.

Educator trusts -mostly set up by grandparents during their lifetimes to help fund their grandchildren’s education and are active upon set up. This is also a useful tool to reduce the grandparents’ estate for Inheritance Tax purposes whilst seeing their grandchildren benefit while they are alive.

Pilot Trusts – very popular before the change of rules on 6 April 2015, where multiple trusts of a nominal sum such as £10 or £100 were set up on consecutive days so that for Inheritance Tax purposes, each trust has its own ‘nil rate band’ (the amount that can pass free of Inheritance Tax and is currently £325,000) and if the amounts paid into the trusts did not exceed the nil rate band, the ‘exit’ (Inheritance Tax charge if the value of the trust funds exceed the nil rate band on set up and payable when assets leave the trust) and ‘anniversary’ (these charges apply every ten years is broadly based on the value of assets in the trust on the tenth anniversary).

Nil Rate Band Discretionary Trust – often set up in Wills of married couples on the first death to use up the nil rate band before the nil rate band became transferrable following the Finance Act 2008. Often this would reduce the amount passing to the surviving spouse and then becoming subject to Inheritance Tax on the second death. The central planning was the use of the deceased spouse’s half share of the property; therefore, there is a danger that these trusts are forgotten about, causing problems on the surviving spouse’s death.

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Do you have any of the Following Trusts

What are the main forms of trusts?

The trusts mentioned above can fall under any of these categories:

Bare Trusts - the beneficiary has an absolute entitlement to the assets, but the trustee holds the assets on the beneficiary’s behalf. This kind of trust arises, for example, when a gift of a property is made to a beneficiary who is under the age of 18.

Life Interest Trust - the entitlement is split between capital and income elements. For example, a surviving spouse is given a life interest in a property, so they are entitled to live in the property rent-free for the rest of their life, or if they go into care, they are entitled to the rental income (if the property is rented out), and the capital value is protected for the children.

Discretionary Trusts – the trustees have the discretion to distribute income and capital to any potential beneficiaries as the trustees think fit. There is usually a pool of potential beneficiaries, but no beneficiary is absolutely entitled to either income or capital unless (or until) the trustees do something to create such an entitlement.

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what are the main forms of trusts

What should I look out for?

Trustees have various duties, including:

  • Balancing the competing interests of all beneficiaries of the trust (this can be particularly difficult between beneficiaries of a Life Interest Trust).
  • Investing the trust assets carefully after taking professional investment advice.
  • Completing and submitting annual self-assessment tax returns for the income and capital gains of the trust.
  • For Discretionary Trusts, completing and submitting supplementary tax returns whenever an IHT charge arises (to include exit and anniversary chares).
  • Running the trust properly, including holding regular meetings to decide what to do with the trust's income and capital in any tax year.
  • Keeping a full record of the decisions taken in trustee meetings.

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What should i look out for

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If you have an unadministered trust and need assistance with bringing all the compliance up to date, or would like to set up one of the mentioned trusts to save Inheritance Tax or protect assets for future generations, please contact our specialist Wills, Trusts & Probate Team on