Lifetime Trust

Setting up a Trust Fund to avoid Inheritance Tax

Trusts are generally legally referred to as settlements. Trusts are a separate legal entity, so any assets gifted to a Trust will fall outside of your Estate after seven years. In other words, you ensure that any of your assets that potentially exceed the Inheritance Tax Allowance are transferred to a trust at least seven years before the death of either you or your surviving spouse, these assets will not be liable to Inheritance Tax. As trusts can be complex in legal wording, we use some of the best lawyers in the country to draft them.

What does Asset Protection Planning do?

This ensures that your assets are passed on to the people that you want them to go to, and nobody else.  They will go to ‘the right hands at the right time’. Before transferring any assets, you should take into account your financial position, and ensure that your lifestyle needs are met before any tax advice, and Estate planning proposals are put in place. Trusts, and their legal wording, are a complex area, and you should always use experienced professionals to carry out your financial planning and guard your interests.

Five reasons to choose an Asset Protection Trust

Reason 1: Trusts are not liable to IHT

  • By gifting your assets to a Trust, they will no longer be included within your Estate and therefore not liable to Inheritance Tax. You can also put your property into trust to avoid Inheritance Tax.

Reason 2: Easy assets ownership control

  • After death, the assets in Trust are owned and run by Trustees (usually you and two other trusted people), on behalf of the beneficiaries (usually your children or grandchildren). Your children can themselves be Trustees; ideally, if they are mature enough and sufficiently good with money to deal with the assets.

Reason 3: The assets stay within your family

  • If your beneficiaries become divorced in the future, the Trust would have only ‘loaned’ money to them.  This means that the loan can be repaid to the Trustees and therefore not form part of any divorce arrangement. If the money had been gifted directly to your children, then they would own all the assets which would mean that in the event of a divorce, there is a high possibility that it would be split with their ex-spouses.

Reason 4: Your money is protected

  • More and more people are becoming self-employed small business owners and running their own companies.  Sadly, statistics show that 8 out of 10 of such businesses will go bust in the first 5 years. Money that’s been loaned to a person via a trust cannot form part of any creditor’s agreement and so is protected for your family.

Reason 5: Assets can be passed on to your grandchildren free of IHT

  • Finally, because assets in trust do not go on to form part of your beneficiary’s estate when they eventually die, the money can be passed on to your grandchildren, also free of Inheritance Tax. Trusts last for 80 years and there are a range of benefits depending on which you choose.

How long can a Trust last?

  • In English law, a Trust cannot last forever and it must be closed within 125 years.  This is known as the perpetuity period (Perpetuities and Accumulation Act 2009). The Trust period for a Trust document established in the UK is a fixed period of 125 years from the date of declaration of the Trust. In practice, most Trusts are set up for a fixed period of 80 years. However, the perpetuities and Accumulations act 2009 made several critical changes to all future Will and Lifetime Trusts.
  • The key change is that a perpetuity period will no longer have to be specified as the new period of 125 years will apply to all Lifetime Trusts set up after the 6th April 2010. Besides, accumulations (growth inside a Trust) can now be made throughout the entire perpetuity period of the Trust. This used to be the lifetime of the Settlor plus 21 years. The previous limit of 21 years still applies to Charitable Trusts.
  • The law provides an opportunity to revisit existing Trusts or existing Wills that create Trusts of significant value to extend the perpetuity period to 100 years if, for some reason, 80 years is deemed insufficient. However, this extension can only be applied to Lifetime Trusts if the Trustees believe it is challenging or not reasonably practicable for them to ascertain whether the lives of the beneficiaries have ended.

Trusts FAQ

What is a Trust?

A Trust is a legal agreement where a person, known as the Settlor, transfers the ownership of his or her assets to another party – a Trustee.

The Trustee holds the assets for the benefit of a chosen person or a group of people – the Beneficiary/ies – without giving them full access to the assets for the time being.  For example, a parent can act as a Trustee for their child.

Who is involved in setting up a Trust?

There are normally three parties involved in setting up a Trust:

  1. the Settlor.  The Settlor sets up the initial asset e.g. an insurance or pension contract and then transfers the ownership of the assets to
  2. the Trustee.  The Trustee is the legal owner of the assets who holds and manages them for the benefit of
  3. the Beneficiaries.  The beneficiaries are the individuals or groups of people selected by the Settlor to receive the benefits of the Trust.

Difference between a Will and a Trust

Many people believe a Will is as effective as a Trust, but this is not always true.  As well as being more effective than a Will for mitigating IHT, using a Trust has other advantages.

Wills  Trusts
Only effective on death
Wills only come into effect on death and therefore are at risk from changes in legislation.
Immediately effective 
Trusts provide certainty, as they are immediately effective.  Changes in legislation will not normally affect existing Trusts.
Probate still needed
Even when a person has made a Will, probate is still needed.
No probate
Assets under a trust are not subject to the delay of probate, as long as there is a surviving trustee. Extra legal costs are usually involved in running a Trust.
Extended administration
With the assistance of one of our strategic partners, we can help you arrange a Will that is correctly worded. We can also help you plan your investments.
Simplified administration with
a Trust is possible to organise investment and estate planning together-we offer different trusts for different asset classes.
Wills become public on death, so everyone can see who received what.  This is not ideal in complex family situations.
Trusts are confidential.  Details are not available to the public.

Can you, the Settlor, benefit from the Trust?

You, as Settlor would not be included as a Beneficiary as this would not work for IHT purposes. For life policy Trusts the reason for this is that the Life Assurance policy premium payments would be treated as gifts with reservation for IHT purposes.  This means the value of the Trust property would be treated as part of your Estate for IHT purposes.

What happens if the Beneficiary dies?

Because potential Beneficiaries of a discretionary trust do not have a right to the Trust assets if a Beneficiary dies, none of the value of the Trust property will be included in his or her Estate for IHT purposes.  This would not be the case had an Interest in Possession Trust been used.

Can the Settlor change the Beneficiaries?

The Trustees will have total control over the Trust funds and the discretion to pay out monies to whomever they feel it appropriate, from the various classes of Beneficiaries.

This means that should any Beneficiary in the future be in receipt of state or local authority benefits the entitlement to money from the Trust fund will not stop these benefits being paid to the Beneficiary. Of course, there is a further benefit which means that should your spouse/partner become involved in any further relationship following your death the assets within the Discretionary Trust will be protected from this third party acquiring them.

Can the Settlor end a Trust?

Once you have written a policy under Trust, you have no power to end the trust other than in your capacity as a Trustee.  The only action you can take is to stop paying the premiums for affected policies.

The Trustees may be able to advance all the trust property to Beneficiaries so nothing is left in the Trust, thus bringing it to an end.

Do I need advice to set up a Trust?

Yes, Trusts, as you can see from all of the above, can be complex and require experienced advice and help to obtain the many benefits they provide.

Lifetime Family Trusts to avoid Inheritance Tax

How does an Asset Protection Trust work?

  • Through the use of a Lifetime Family Trust the Nil Rate Band of the first deceased spouse can be protected and used for protection of the Estate.  On the death of the first spouse, assets to the value of the NRB applicable at the time of death are peeled off from the estate and passed to the surviving spouse via a codicil in the Will.
  • This codicil gift is done in such a way as to create a debt on the surviving spouse’s estate so that in the event of death (of the surviving spouse) this amount must be passed back to the Lifetime Family Trust prior to being passed down to the Beneficiaries.
  • Interest at an agreed commercial rate can be charged by the Trustees and rolled up within the outstanding debt, payable on death of the surviving spouse.  To ensure that this arrangement is effective, at least two Lifetime Family Trusts must be put in place, one trust in your name and one in your spouse’s name.  Depending on the estate size and your investment portfolio, it may be beneficial to set up more.

The two Lifetime Family Trusts effectively ensure that both you and your spouse receive the benefit of the NRB.  Under present legislation this means that £325,000 (2010/2011) each will be protected.  This arrangement could also protect the estate from future care home costs.

Lifetime Trust FAQ

What is a Lifetime Family Trust?

A Lifetime Family Trust is basically a Discretionary Trust, set up to protect your assets for your own bloodline.  The difference between Lifetime Family Trusts and one set up by a Will Trust, is that Lifetime Family Trusts are set up literally during your lifetime, using a small settlement of £10 into the Trust.

This means that as part of your Estate Planning you can have more than one Trust (in order to effectively manage your Inheritance Tax obligations) and you give your Beneficiaries- usually your children – the option to do different things with the assets you leave.  For example, one child may wish to leave any monies in the Trust for your grandchildren, whilst another may wish to draw on the funds.

Why use a Lifetime Family Trust?

The main principle is that the Lifetime Family Trust allows the use of two sets of the Nil Rate Band (NRB) for asset protection planning purposes.  This is the amount of an estate that can be passed down without any liability to Inheritance Tax.

How to avoid Inheritance Tax with a Trust

We won’t pretend otherwise, this is a complicated area of Estate Planning, but it is also one that definitely warrants working with an experienced Inheritance Tax Adviser.  Tax advice which results in high tax savings should be carefully considered if you are making a financial plan for your family’s future benefit.

We strongly recommend that you seek Inheritance Tax advice before undertaking any type of Trust.  Trusts, and their legal wording, are a complex area and you should always use experienced professionals to carry out your financial planning and guard your interests.

Are there other types of plans in which Lifetime Family Trusts are used?

Yes.  Other trusts exist under the Lifetime Trust banner.  If you are a millionaire and form part of the wealthy retired group, please contact us for further information.

Lifetime Trust benefits

1. Protect your entire Estate in event of your children becoming divorced or bankrupt

2. Protect your entire Estate if your children predecease their spouse and your ex-son or daughter-in-law get remarried

3. Avoid Inheritance Tax being paid on your Estate by your grandchildren when your children die – double taxation

4. Obtain double taxation relief on the value of a Limited company if you are small business owner

Lifetime Trusts for Business Owners

As a small business owner, you may choose to sell or wind up your business rather than leave it to Beneficiaries in your Will. You would then be able to leave the liquid capital to your Beneficiaries instead. This has the advantage that the value of the business would be precisely fixed and available in cash. However, cash does not qualify for BPR, so this approach has significant IHT drawbacks.

Trustee FAQ

Who can be a Trustee?

In general, you, the Settlor, can appoint individuals or a corporate Trustee.  The Trustees could be another family member or a close friend.  It should be someone you can trust.  The basic rule is that a Trustee must be at least 18 years old and of sound mind.  The named Trustees must also accept the appointment for it to be valid.

You can appoint yourself as a Trustee as well.  This gives you some control over the Trust property during your lifetime.

How many Trustees does the Trust need?

It’s a good idea to have at least two Trustees (in addition to yourself).  This ensures that control of and access to the Trust fund continues following your death and that a claim can be paid without waiting for probate, provided that at least one Trustee is still alive.  If there was only one Trustee and he or she died, then the administration of the Trust would be transferred to the deceased Trustee’s legal personal representatives.

Should I use professional Trustee services?

In some circumstances, you may have to appoint an independent Trustee to exercise certain powers within a Trust.  The trust provisions will say if an independent Trustee is required.

What are the duties of the Trustees?

The Trustees must carry out certain duties.  The main responsibility is to look after the Trust property in accordance with the terms of the Trust and Trust law.  The Trustees must administer the Trust honestly and impartially for the benefit of all Beneficiaries.

The Trustees must make any decision about the trust collectively.  If one Trustee disagrees with a proposed course of action, it cannot go ahead, unless the Trust provides for a majority decision.

If the Trustees act in a manner, which the terms of the Trust do not allow, there will be a breach of Trust for which the Trustees may be personally liable.

Are Trustees paid for their duties?

Professional Trustees, such as lawyers, accountants or a Trust corporation, can receive payment for their duties when administering the trust, providing the trust has clauses to allow for this.  However, a Trustee is not normally allowed to make a profit out of his or her duties.

Who can appoint Trustees?

Generally you, the Settlor, will have the power to appoint additional Trustees.  You can do this throughout your lifetime and then the right will be transferred to the remaining Trustees.  New or additional Trustees can be appointed at a later date.

Can a Trustee retire?

A trustee can retire from trusteeship as long as all the trustees agree to his or her retirement.  The person who has the power to appoint additional trustees, normally you, the settlor, must also agree.

Often, there is no need to appoint a replacement trustee at the same time as one retires.  However, if that would mean only one trustee remains (other than a corporate trustee), then an additional trustee will need to be appointed before the other one retires.

Is it possible to remove a Trustee without their consent?

The trustees are able to remove another trustee either by statutory removal or by obtaining a court order to this effect.  It is therefore important you choose any additional trustees with care.

Can the Trustees pay regular withdrawals to the beneficiaries?

It is not wise for trustees to pay regular withdrawals from an investment bond to the beneficiaries.  Regular withdrawals may be treated as income by the Inland Revenue and therefore liable in full at the time of payment, to income tax.  However, the Trustees can make a one-off withdrawal to a beneficiary if sufficient proof of his or her right to the trust property can be provided.

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