Very simply, when you place assets into a trust, what you're effectively doing is giving the assets out of your estate. If you do that during lifetime and, providing the amount you put in is less than the Nill Rate band, which is 325,000, there won't be an immediate tax charge. If you gift more than 325,000 into a trust during lifetime, there will be an immediate20% tax charge. We do not do that as advisors. Also, when you die, there wouldn't be any inheritance tax savings. If you gift anything more than 325,000, whether it's into a trust or to anybody else, let's ignore the allowance for the residential Nill Rate band that only applies actually to a main residence, effectively there will be inheritance tax. So, on death, there is no inheritance tax saving by putting the money into a trust. But once the money is in the trust, how does it actually protect the assets? Let's think of the trust as a box. When the person dies, or during lifetime, they put the assets into the trust – the box. The assets are in that box and when the trustees, who control the trust, go to pass the money out, they ask the beneficiaries to sign a separate legal agreement, saying that the money is a loan from the trust. This is really important, because it's the whole mechanism that protects the assets, whatever the issue is. By making a loan to the beneficiaries, the money is interest free, it's for the rest of their lives and it's repayable on demand by the trustees. In most family trusts, your children will be the trustees when you die or potentially your grandchildren. Inevitably, they are their own trustees in the same way as I can be a director of my own limited company and also own the shares.
In a trust, the trustee controls the trust on behalf of the beneficiary. Essentially, they lend themselves the money, because there's more than one trustee and there's more than one beneficiary. Normally a trust is set up for children and grandchildren and potentially great grandchildren to be the beneficiaries of this trust.
Let's say then, one of your children, 10 years after you die, has to go into a divorce. They go and see their brother and sister and say: “Unfortunately, I’m getting divorced.” The priority for the trustees in that situation would be to protect the money. They will collectively draw the money back into the trust by utilizing the legal agreement. As a result, the money is now in the trust, the divorce takes place, the day after the divorce is settled, the money can be passed out to the beneficiary once again. There's no way a judge can overturn some thing like this because you can't define only one of the children as a beneficiary. It's your children and grandchildren, even if they're not born yet.
In the same way, if a couple would get divorced, and they owned a house worth£800,000, and they had a £200,000 mortgage, they couldn't take £400,000 each and go their separate ways. They would have to pay their mortgage back first and take the remaining money to be split between them. In the same way, the trust acts like a lender and it has lent the money to the beneficiary, and that money is due back when the trustees demand it. And that's the protection mechanism that works. It even works in the event of bankruptcy of one of your children or their spouses. If one of your children dies early, then the protective mechanism stops your grandchildren from having immediate access to the assets, because, on death, the money is reclaimed by the trustees back into the trust and then the trustees control it to pass on to the grandchildren if they think they're old enough, etc. All of these mechanisms come around the fact that loan is made from the trust and it's a legally drawn up agreement and signed and witnessed and everything else to make sure it's legally binding. And that's the mechanism that protects your children in the long term.