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Estate Planning & Types of Trusts

Advanced estate planning using trusts

During the early 1500's in England, landowners found it advantageous to convey the legal title of their land to third parties while retaining the benefits of ownership. Because they were not the real "owners" of the land, and wealth was primarily measured by the amount of land owned, they were immune from creditors and may have absolved themselves of some feudal obligations. While feudal concerns no longer exist and wealth is held in many forms other than land (i.e., stocks, bonds, bank accounts), the idea of placing the property in third-party hands for the benefit of another has survived and prospered. This is the idea of a trust.

Lasting powers of attorney

Generally, a trust is a right in property or assets which is held in a fiduciary relationship by one party for the benefit of another. The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the trust.

What is an Estate?

Your estate is made up of everything you own ie properties, monies, pensions, life insurances, cars, jewellery, assets, stocks & shares, personal belongings and debts.

What is Estate Planning?

An estate plan sets out how you wish to distribute everything you own to the people (your beneficiaries) who will inherit from you after you die.

Most people think they won't need to do any sort of estate planning and think that the existence of a simple will is sufficient. However, wills are simply legal documents that express the deceased's intentions for burial/cremation and to whom he or she wishes to pass monies and property (the estate) when the person dies.

A judge has to allow the transfer of that money and property from the deceased's accounts to the beneficiaries' accounts. This procedure is known as probate, and it opens the door for relatives or third parties to contest your will and for a judge to misinterpret your wishes, both of which can tie up an estate in court for years.

Furthermore, probate fees can cost thousands of pounds. There are executor fees, court fees, recording fees and Solicitor fees, in many cases, these fees must be paid as the estate is probated, meaning that the beneficiaries will need to come up with the money fairly quickly upon the person's death. A will also does not alleviate the problem of inheritance taxes.

Estate planning is not just the rich and wealthy, it is for everyone. Without an appropriate estate plan, beneficiaries friends and relatives can spend a lifetime plus their life savings battling over your assets. It can be intimidating, but it is a necessary step in ensuring your assets end up where you want them, without the intervention of HMRC or third parties.

Creating a trust is a great way to mitigate some or all of the inheritance taxes that would otherwise be owed upon your death. A trust allows a person to transfer legal title of his or her property to another person while they're still alive, potentially saving thousands in taxes.

A trust also gives the trustee (the person acting on behalf of the deceased) the authority to distribute assets immediately to the beneficiaries based on the terms of the trust.

No court is involved, so there are no probate fees and no public record of the value of the estate.  Trusts are not for everyone, however, it is important to seek proper legal advice.

What is a Trust?

Trusts are often misunderstood and widely seen as something just the wealthy. Trusts allow better control over how assets are used and managed. Their use is far more common than many people might think.A trust is a formal arrangement where the transfer of assets from party A, (this could be property, shares or just cash) to a small number of people (two or three) or to a trust company party B, with instructions that they hold the assets for the benefit of others party C. In legal terms the person giving the assets is usually known as the ‘settlor’ The people or company looking  after the assets are called the ‘trustees’ and the people who will benefit from the trust are called ‘beneficiaries’.

The details of the arrangement are usually laid out in a ‘trust deed’ and the assets placed in the trust are the called the ‘trust fund’

Why set up a trust?

The reasons for creating a trust can vary widely. For most people, however, the type of trust they are most likely to be asked to make decisions about personally is a trust established to arrange their family’s financial affairs. The main attraction of trusts is that they give the settlor greater confidence in how assets will be used in the future. Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Indeed, discretionary trusts can be created to benefit people who are not even born yet – such as any future grandchildren someone may have.

Some of the most common family situations where trusts are used (often in conjunction with a will) are:

It is clear that trusts are particularly useful when planning how money and assets should pass from one generation to another, especially when family structures are complicated by divorces and second marriages.

This, coupled with the growing frequency of marriage breakdowns, makes trusts an excellent tool for making long-term plans to ensure a family’s financial security

What are the main types of trusts?

There are two main types – bare/absolute trusts and discretionary trusts. A bare trust is usually set up for a children or grandchildren and has the advantage that the money is taxed as if it belonged to them using their personal tax allowances. The disadvantage is that when the beneficiary reaches 18, or 16 in Scotland, they have a right to the money, so it’s probably not recommended for large amounts.

Parents can also get caught out by the £100 rule. Under the rule, if the money a parent transfers into a bare trust for their children generates more than £100 of income, that income is taxed as the parent’s.

Discretionary trusts are far more flexible, which allows you to have a range of beneficiaries as well as greater control over when and even whether they receive any proceeds. This does comes at a cost! The price for this control and flexibility is that these trusts come under complex inheritance tax, income tax and capital gains tax rules.

Regarding inheritance tax IHT, anything you pay into a discretionary trust is deemed as a chargeable lifetime transfer if you transfer more than the £325,000 nil rate band over a seven-year period you will pay a 20 per cent tax charge on any excess. There’s also a further 6 per cent tax charge at each 10-year anniversary of the trust, which will apply to any excess over the nil rate band, plus an exit charge of up to 6 per cent.

Trusts clearly have benefits in financial and estate planning, The taxation of trusts is hugely complicated.

If you would like any advice on advanced estate planning, please give us a call on 0800 6226 871

Follow this link for a general cost of setting up a trust.