Trust and Inheritance Tax: Five good reasons to use a trust
Trusts take an important role when estate planning. Trusts ensure assets can be easily managed by trustees and that the assets can be ring-fenced.
Five good reasons to use a trust to avoid Inheritance Tax:
1.) Managing assets
Trusts are very flexible meaning you can tailor the trust to your needs and situations:
- Do you have a beneficiary who isn’t capable for any reason (EG-a minor or disabled) to personally manage the assets?
- Do you have a level of mistrust with another beneficiary to own the assets themselves? (EG-Gambling addiction)
- Could there be potential conflict between beneficiaries when the estate is settled? (EG-between children from different marriages?)
If a trust were in place, the trustees can distribute the assets to the beneficiaries over time.
2.) Protecting assets
There are different types of trusts which can protect you from creditors, marriage breakdown or from anyone who may influence beneficiaries.
An example would be a discretionary trust. A discretionary trust would offer protection as the beneficiary cannot access any of the assets until the trustee appoints it to them.
When considering a bare trust, the beneficiary can access the assets at any time meaning there is no protection.
Some particular trusts allow you to make a gift of money into a trust, for specific beneficiaries as long as you still continue to receive a benefit from it. Discounted gift trusts and flexible reversion trusts allow you this kind of flexibility. Some trusts give the trustees full control of the trust in case there is a worry by the settlor about the beneficiary not being mature enough. This way the trustee can be in control of the trust beyond the age of 18, without the worry of it becoming a discretionary trust. These types of trust are offered from many different providers allowing the funds to either be kept back until a certain age or distributed in smaller regular amounts instead of all in one lump sum.
4.) Minimising tax
A lot of people believe that the main reason for using trusts is to reduce the inheritance tax on the estate after the settlor’s death. In other words, assets which are put into trusts are given to beneficiaries and will fall outside of the settlor’s estate, but only if the settlor lives longer than 7 years after the trust was set up.If the settlor dies within the 7 years, then any growth of the trust will not be included within the IHT bill, only the amount originally put into trust.
5.) Avoid probate
Assets within a trust no longer belong to the settlor, but to the beneficiary meaning on the death of the settlor, the value of the asset is not included within the estate for probate reasons. This saves you time, legal fees and a lot of paperwork. When dealing with life policies, the insurance provider will be able to pay the death benefit quicker as they can simply just pay the legal owners and doesn’t require the grant of representation, meaning it could be paid in a matter of weeks.
Trusts are a very useful estate planning tool, but choosing the right one for you is crucial which is where you will need to seek professional advice. If you are interested in starting a trust or have any other questions, please contact us and we will be happy to help.