Inheritance Trusts

Inheritance Trusts - Expert Tax and Estate Planning Advice Trusts - A Warning:

The Chancellor has changed the rules on taxation of trusts in his budget speech on 22 March 2006 to bring many trusts and their inheritance taxes liability in line with discretionary trust taxation.

Existing Trusts:  This area is extremely complex and we suggest that you seek advice from us before amending any existing trust.

• Absolute or Bare Trusts  - If you had an Absolute or Bare trust set up before 22 March 2006 generally the trust is unaffected.
• Flexible Trust or Interest In Possession Trusts  - If you had a Flexible Trust or Interest In Possession Trust set up before 22nd March 2006, care should be taken not to change the life tenants in this trust unless you amend the interest to an absolute, non-reversible status, as any change could trigger tax issues (October 2008 deadline to make changes)
• Discretionary Trusts  - If you had a Discretionary trust set up before 22 March 2006 generally the trust is unaffected, you still potentially get caught for taxes under chargeable lifetime transfers rules as you did before.

So What Has Changed Since 2006?

• Gifts into a trust are no longer Potentially Exempt Transfers (PETs)
• Gifts into a bare trust (an absolute trust) are still a Potentially Exempt Transfer PET because it is a gift to an individual absolutely.
• Gifts into a disabled trust are still deemed as Potentially Exempt Transfers PETs
• Gifts to flexible trusts, interest in possession trusts and to accumulation and maintenance trusts are no longer treated as potentially exempt transfers, they are treated in the same way for tax as discretionary trusts.

This means any gifts to these types of trusts are now potentially chargeable to tax at the lifetime transfers tax rates when they are made.

This is a highly complex area of financial and tax advice. 

1.  What is a Trust?

A trust is where assets or property are held by one person in 'safe keeping' for another.

Maximum term

The maximum time a trust can run for is 80 years.  Many have shorter terms and pay out due to conditions of the trust being met, for example, death, or the trust term is set to a particular term or age, for example, 18 or 21 if for children.

Monks started it all

Trusts have been established in the English common law legal system for over 1,000 years.  They evolved broadly because monks who took a vow of poverty could not own property. 

This principal of holding property 'in trust' for another is a very popular way today of passing on your wealth to others.  Using a trust can reduce certain taxes on death as you no longer own the property as it is held inside a trust i.e.  it is not yours and therefore not part of your estate on death for tax purposes.

Trusts give choice

A trust is a way of choosing who will receive a certain benefit without giving that person immediate control of it.

A trust is set up by a trust deed and it is this document that sets out who is involved, who made the gift and who ultimately will get the property and the terms that apply to it.

2.  Why Use a Trust?

There are many valid reasons why you should consider using a trust.

Much will depend upon the type of trust that best suits your needs, but we suggest the following can be of major benefit:

• Your assets are left to who you wish them to be left to
• Your assets growth can be free of any inheritance taxes
• Your assets can be protected from care fees agencies
• Your assets can be protected from creditors
• Your assets, depending upon where you live or retire to in the future, could provide tax efficient and even tax free access to income or growth
• There are trusts that offer you income but the remaining growth is left for beneficiaries

The list of benefits with a carefully selected trust can be endless.

There are even countries where if you place assets in trust before your arrive, the whole income drawn from them is tax free!

Equally though, we have to stress that selecting the wrong trust can have severe tax consequences.

3.  Choosing Trustees

You cannot appoint anyone who is classed as a minor, i.e.  a child under the age 18, as a trustee.  

You can appoint someone over 18 and of sound mind to act for you.  It is also possible for the life assured of a policy and a beneficiary of a policy to be trustees.  If this is the case, it may be wise to appoint another trustee.  

The maximum number of trustees on a policy is usually four but they can be changed by the settlor by using a Deed of Appointment.  

When choosing trustees, you should bear in mind their duties:

• To make sure that the trust property is safe and that no loss is suffered by the beneficiaries
• They should not make a profit or buy trust property for their own use
• They must not favour one beneficiary over another unless the Trust Deed explicitly says they should.

Professional Trustees:

We suggest for certain complex offshore and tax planning trusts, where an 'at arms length' management is required, you may wish to consider professional trustee management firms. 

These are common place and many already have their own 'off the shelf' trust wording packages.

4.  Setting up a Trust

Once you have decided on the most investment and trust type to arrangement to use in your particular circumstances, all you need to do is complete any investment forms and the trust deed form.

New and Existing investments - Take advice:

We strongly recommend that you take advice from us or a solicitor to make sure the trust is right for you.

Trusts are complex and you should seek professional advice in your particular circumstances as to what is appropriate.

5. Trust Jargon Explained

Settlor

If you were to set up a trust you would be known as the 'settlor'.   This means that you would provide the policy to be put into trust.

Trustee

Certain people are appointed to manage the investment whilst it is in the trust.  These people are known as the 'trustees'.

Beneficiary

Trustees hold the policy within the trust for the eventual 'beneficiaries' who will receive the proceeds of the policy when a certain event happens, for example: when you die.

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