In the financial services sector the concept of a trust and the specialist terms and jargon that go with them are very familiar. However, unless you have been involved in a trust yourself, understanding some of the language used and how trusts can help may not be familiar to you. Peter Webb, our Head of Tax Advisory, explains some of the key areas to know about when considering using a trust.
Understanding what a trust is, how it can help you, and when you should consider using one can be very helpful when you’re thinking about tax and estate planning. Trusts can be very useful tools to help you save tax and get your affairs in good shape.
Simply put, a trust is a legal arrangement that allows you to put your assets in a secure place to be held for the benefit of your beneficiaries. You gift assets to trustees. The trustees then administer those assets for the benefit of the named beneficiaries of the trust.
Trusts have their own special terms and language, as you’ll have seen above with the use of “trustees” and “beneficiaries”. So it makes sense to explain some of those terms in a little more detail. There are three key people who are involved in the creation of a trust.
The settlor is the person or people who establish and gift (“settle”) assets into the trust. Settlors are generally individuals or couples.
The trustees are the people who have control of the trust and look after it. Anybody can act as a trustee as long as they are over 18 and have full mental capacity. There is nothing to stop the person who gifted assets into the trust from acting as a trustee; in fact this can be helpful if they wish to maintain some control over the assets being held in the trust.
The beneficiaries of the trust are the people who will receive income or gains or have the ability to use the assets being held by the trustees. To give a simple example the beneficiaries may be entitled to receive the rental income from a property or perhaps be entitled to live in a house owned by the trustees.
The next steps to consider are how a trust can help you and when should you consider using one. Below are some of the more common situations where a trust could be helpful.
A trust may allow you to maintain control over the assets you’ve gifted. We most regularly see this when somebody marries for a second time but would like their children from their first marriage to benefit from their assets when they pass away. A trust can allow your second spouse to benefit from your assets during their lifetime but ensure those assets are protected and will be passed to your children when your second spouse passes. So for example, you may want your spouse to continue living in your shared home until such time as their death. At this point the property can then be passed on to the children from your first marriage.
Trusts also offer a means of protecting assets for your beneficiary. So there is the potential to protect assets against the divorce or bankruptcy of your intended beneficiary. One example are special protective trusts which allow a beneficiary the right to income from assets held in a trust. This right ends if the beneficiary tries to sell the asset or their right to receive income from it.
Generally, trusts are not very helpful in saving Income Tax or Capital Gains Tax. However, trusts can help to reduce the amount of Inheritance Tax paid. In a worst case scenario Inheritance Tax charges can be as high as 40% on everything you leave above GBP325,000. It’s worth mentioning that, generally, if you leave assets to your spouse and you share the same tax “domicile” status no Inheritance Tax is charged if you leave all of your assets to your spouse. By gifting assets into a trust you may be able to hold those assets outside of your Inheritance Tax chargeable estate, provided that various conditions are met, and still maintain some control over those assets.
Making probate easier
Assets held in trust sit, generally, outside of your estate. This allows the executors of your estate to access the funds held in the trust for the benefit of your family (for example) without any delay. On average the probate process in England and Wales takes around nine months to a year to complete, so it can be a useful step to take.
These are just some of the ways a trust could be of use to you. To talk about how a trust could benefit you and your family please do contact your nearest office.