There are few taxes more unpopular than Inheritance Tax. A poll by the financial website, loveMONEY last year found that an incredible 90% of Brits believe it is unfair.
However, there are a number of perfectly legitimate ways to reduce the amount of tax your estate will have to pay. One of those is making use of a Trust.
What is a Trust?
A Trust is a legal arrangement, which can be used during lifetime or on death, where your assets – such as property, cash or investments – are given to trustees, who will oversee them for the benefit of a third person. For example, you might want to put some savings into a Trust which your children can then benefit from at a later date.
When you place items into a Trust, they technically no longer belong to you. Instead, the assets belong to the Trust. The trustees are charged with managing those assets in the interest of the beneficiaries you have named, until the time when those beneficiaries can take control. As a result, in most circumstances, when it comes to working out the Inheritance Tax due on your estate, those assets are not included. Although, whether your overall liability is reduced will depend upon whether you survive seven years from settling the funds.
Types of Trust
Trusts come in a variety of different forms, which will suit different circumstances.
The simplest form is a Bare Trust – which basically hands over ownership of the assets to the beneficiary immediately, so long as they are over the age of 18.
Alternatively, there is an Interest in Possession Trust. This gives the beneficiary income from the assets held within the Trust, but they do not have a right to the assets generating that income. An example of this is that you might want your partner to receive the income during their lifetime but when they pass away the funds pass to your children. This is commonly used in Will planning where the client has children from a former marriage.
Then there is the Discretionary Trust. This is where the trustees have responsibility for deciding how the assets within the Trust are distributed. This is a very flexible arrangement enabling you to leave assets in Trust for a number of potential beneficiaries which might include your children and grandchildren. The trustees would use their discretion to determine how the funds are distributed. Usually they would be guided by a letter completed by the person setting up the Trust indicating how they would like the funds to be handled.
Trusts are a useful way to take control of passing on your assets to your loved ones. They can also serve as a complement to a comprehensive Will. Putting a Will in place gives you a say on who will get your assets and gives loved ones as much guidance as possible.
For more information on the best Trust to use in your circumstances please get in touch.