What is a trust?

A trust is a legal agreement that lets you transfer the ownership of your assets to another person.

Who is involved in a trust?

There are normally 3 parties:

– The settlor who is the person that sets the trust up and puts, for example, a life insurance policy into it. They choose the trustees and who they want to benefit from the trust.

– The trustees who look after the assets of the trust and manage them in accordance with the trust deed and in the best interests of the beneficiaries.

– The beneficiaries who are the people who may receive the money or other benefits from the trust.

Why should I think about using a trust?

Depending on the type of arrangement, trusts can:

– Ensure that the benefits on death are paid to the people that you want them to go to, and avoid proceeds or the assets in trust being used to offset debts of an estate

– Legitimately avoid inheritance tax by taking the assets out of your estate

– Provide money quickly to pay any inheritance tax due on your estate without having to wait for probate to be granted. It is worth noting that probate can take months whereas trustees are free to deal with the payment immediately.

What assets can I write into trust?

• Property and land
• Financial assets such as shares
• Life Insurance
• Personal property
• other assets, such as paintings, furniture or jewellery – sometimes referred to as ‘chattels’

PROPERTY TRUST
You can put any type of property into a trust. This might include your own home and any investment properties, such as buy to let properties.

Putting property into your trust can help to protect the asset for your beneficiaries.

Personal property can also be placed into a trust, however it is only worth putting in asset that are of high value.

FINANCIAL ASSETS TRUST
Any money and stocks and shares which you wish to give as a gift to someone can be put into a trust. This can have a number of benefits and can be a method for avoiding any unnecessary inheritance tax potentially saving you or your beneficiaries thousands of pounds.

LIFE INSURANCE POLICIES TRUST
Life insurance policies can be “written into a trust”, which means that if a claim is made, the insurance company pays out any successful claim to the beneficiaries named in the trust. This can mean that the proceeds do not form part of your asset and therefore are not subject to inheritance tax.

OTHER ASSETS
Other assets of high net worth can also benefit from being written into trust.

The tax implications

Writing assets into trust can be complex and a qualified financial adviser will be able to talk you through the different types of trusts and which would be suitable for your situation.

Below are the basic types of trust:

Bare trusts: With bare trusts the beneficiary has an immediate and absolute right to both the capital and income in the trust.

Beneficiaries will have to pay Income Tax on income that the trust receives. They might also have to pay Capital Gains Tax and Inheritance Tax.

Inheritance Tax is sometimes payable if the person who put an asset into the bare trust dies within seven years of doing so.

Discretionary trusts: A discretionary trust is one where trustees have ‘discretion’ about how to use the income of the trust, and sometimes the capital.

In discretionary trusts, income is taxed at the special trust rates, apart from the first £1,000 of trust income. Income that falls within this ‘standard rate band’ is taxed at lower rates, depending on the nature of the income.

However, if the person who put the assets into the trust (the settlor) has more than one trust, the £1,000 standard rate band is divided by the number of trusts they have. If the settlor has more than five trusts, the standard rate band is £200 for each trust.

Interest in possession trusts: An interest in possession trust is one where the beneficiary has an immediate and automatic right to the income from the trust after expenses.

The trustee must pass all of the income received, less any trustees’ expenses, to the beneficiary.

However, the beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future.

For example: If Robert leaves shares in trust, his wife may be written in as the income beneficiary and his children beneficiaries in the future. So his wife will stand to get all dividends for as long as specified (often until her death). Upon her death, the trust dissolves, and their children get the shares in whole.

Note: Some trusts for disabled people and children get special tax treatment which means they may pay less tax. These trusts are known as trusts for ‘vulnerable beneficiaries’.