What are trusts?
Put simply, a trust is another way of giving away your assets. Rather than giving an asset to someone outright, you can settle an asset in a trust for the benefit of the intended recipient (the Beneficiary). Trusts can be set up during someone’s lifetime or on death. Trusts are sometimes called settlements.
Why are trusts used?
Trusts have been used for centuries as a way of protecting assets from tax and also as a means of ensuring that the wishes of the person making the gift are followed.
There are many other reasons why trusts are used but these are some of the reasons:
- to make gifts for the maintenance and education of children or grandchildren
- the protection of the interests of the disabled or mentally incapable
- the protection of personal injury awards and means tested benefits
- the protection of assets for the next generation
- flexibility in giving away property but still having some control over it
What different types of trusts are there?
The trusts we set up for our clients depend on your objectives and the choice of assets to settle (that is gift) to the trust. For instance, would it be appropriate for you to transfer your home or a property into a trust or perhaps money, stocks or bonds? If your principal concern is to protect the interests of younger children then there are trusts specifically for this purpose.
There are a number of different types of trust. The following are among the more common:
- Bare (or Simple) Trusts: the beneficiary has an immediate and absolute right to both the trust capital and the income it produces. The beneficiary has the right to take possession of the trust property.
- Discretionary Trusts: trustees of a discretionary trust have the discretion about how to use the trust assets. These trusts can be very flexible and the trustees can decide:
Interest in Possession (IIP) Trusts: the beneficiary has a current legal right to the income from the trust. The trustees must pass all the income received, less any trustees' expenses and tax, to the beneficiary. This entitlement can be for the beneficiary's lifetime, depending on the purpose of the trust and the wishes of the person who created it.
- Charitable Trusts: if property is held for charitable purposes, tax gains on the fund are normally exempt.
It is important to remember that, although trusts are often useful tax planning 'tools', there are other excellent reasons for setting up a trust where the first priority is not necessarily saving tax, such as protecting the assets for young children.
Inheritance Tax and Trusts
Most transfers into trusts which exceed £325,000 in value will be immediately chargeable to Inheritance Tax (IHT). The exception is where the trust is set up for a disabled person or for charitable purposes.
To learn more about IHT please read our article on Inheritance Tax Planning
How we can help you
There are many reasons to set up a trust. Trusts can give flexibility in estate and generation planning.
For more information or advice on trusts, please contact Charles McKenzie or John Rouse.
