Types Of Trust
A trust is where assets or property are held by one person in 'safe keeping' for another.
Choosing the right trust can be tricky, speak to us about your needs and get help selecting the right trust for you.
1. Bare Trust
When you are certain about who you wish to benefit from a trust and there is no doubt, you may wish to consider an absolute trust, also known as a bare trust.
Important note: Once this trust is set up, the beneficiaries cannot be changed. You must be certain.
The money inside this trust cannot ever be claimed back by you and can be demanded by the beneficiaries at age 18 (16 in Scotland).
Tax charge
This type of trust is not subject to the 10 year periodic tax and exit charge rules that most other trusts are subject to.
This type of trust may be suitable for:
These trusts are not suitable if you require a degree of control or flexibility to change the beneficiaries.
2. Bereaved Children Trust
In 2006, new rules were introduced for 2 types of trust created on death of parent:
They allow income to be accumulated but do not apply the full rigours of the periodic and exit charge rules.
Trusts for ‘bereaved minors’:
18-25 trusts for minors:
These again must be created on the death of parent by will or intestacy or under the Criminal Injuries Compensation Scheme.
3. Flexible Trust
When you are not certain about who you wish to benefit from a trust and there is doubt or you may wish to leave it a little open just in case things change in the future, you may wish to consider a Flexible trust, also known as an Interest In Possession trust.
Income - Life Tenants
In short, you specify a list of beneficiaries who are entitled to income from the trust but not the capital. For example: "My wife, Doreen". This is known as the 'Life Tenant'. The income is more relevant for an investment in trust.
Capital
The capital of the trust is left to a list of or category of beneficiaries that you specify, whoever they be, for example "my wife and my children". These are the 'Remaindermen'.
On death, the capital in the trust e.g. the life insurance sum assured, is paid out to the remaindermen beneficiaries at the discretion of the trustees.
Tax charge
This type of trust is subject to the 10 year periodic tax and exit charge rules that most other trusts are subject to. Although, if used for a life insurance protection scheme, it is unlikely to be affected unless you die leaving young children lump sums that have to stay in the trust until they are adults.
This type of trust may be suitable for:
4. Discretionary Trust
When you are not certain about who you wish to benefit from a trust, you can establish a range of potential beneficiaries, e.g. "my family including those as yet unborn"
Income
The income generated in the trust e.g. investment income, is paid out to the beneficiaries at the discretion of the trustees. The trustees can choose to pay out or not.
Capital
The capital of the trust is left to the category of beneficiaries that you specify, whoever they be.
On death the capital in the trust e.g. the life insurance sum assured, is paid out to the beneficiaries at the discretion of the trustees. The trustees can choose to pay out or not.
Tax charge
This type of trust is subject to the 10 year periodic tax and exit charge rules that most other trusts are subject to. Although, if used for a life insurance protection scheme, it is unlikely to be affected unless you die leaving young children lump sums that have to stay in the trust until they are adults.
This type of trust may be suitable for:
People who wish the trustees to have the flexibility to pay benefits at their discretion.
This trust may not be suitable for:
People who want an element of certainty that benefits will be paid out to family or other named individuals.
5. Disabled Trust
A disabled trust is a discretionary trust where at least half the gift assets placed in trust are used for the benefit of the disabled person or a trust in which a disabled person has an interest in possession.
A disabled person is a person who is not capable of managing their own affairs.
This can be for physical or mental reasons.
A disabled person can also be a person who receives attendance allowance or disability living allowance or would do so if they were not in certain types of provided accommodation or living abroad.
6. Discounted Gift Trust
Reduce the value of your estate by £thousands in minutes
This is an excellent way to immediately reduce the value of your assets for Inheritance Tax whilst still being able to receive an income from the investment.
In simple terms, you settle i.e. gift your money to a trust. As the investor, you retain the right to a fixed "income" of withdrawals, typically 5% of the original investment each year.
The retained right to this "income" for life is valued based upon your health, income level and life expectancy. This is the 'discount' on the gift.
The balance of the monies left is deemed the actual gift and these remaining investment rights are held under trust for your beneficiaries.
For example:
You may gift £100,000 into a trust that then is discounted for the right to the income at say £45,000, meaning that the actual "gift" is deemed at say £55,000.
The total investment, including the life cover built into the investment, is still worth £100,000 and still grows, but the monetary value of the gift that you made to the trust is just £55,000.
This means that if you die within seven years only the £55,000 would be taken into account when valuing you assets and not the £100,000, despite your beneficiaries actually receiving £100,000.
In addition you can still take income from the £100,000 that you have gifted.
7. Double Trust
Double trust schemes had an aim of enabling you to pass on your home while continuing to live in it.
Normally this would be classed as a gift with reservation because you continue to live in it rent free.
This will now fail as measures were introduced to catch this anomaly under pre owned assets tax (POAT).
House Debt
Another scheme known as the 'house debt scheme', involved the sale of the house to an interest in possession trust, with the purchase price still to be paid, then a gift of the debt to the seller’s children or more usually a separate trust for their benefit. Without getting too complex, amendments to stamp duty rules for trusts effectively made this practice unattractive.
These schemes are caught by the pre-owned assets tax rules (POAT).
8. Life Cover Trusts
Use Life Insurance under Trust to Cover the Tax Inheritance Bill
Calculate Tax Bill - Speak to us to get advice on calculating your inheritance tax liability.
If you calculate what the value of your estate could be on your death, assuming it is not all being passed to a spouse or civil partner but is actually chargeable to Inheritance Tax, it is then possible to work out what 40% of it would be.
This is the amount of tax that would have to be paid either on first death if single or second death if married/civil partner.
It is then possible to plan to actually meet the inheritance tax bill.
This can be done by taking out a simple 'whole of life' insurance policy and putting it in trust for your eventual beneficiaries.
The level of cover under the policy could be either equal to the tax bill, increasing at a certain percentage each year to make sure it keeps up with your estates increasing value or at an amount equal to what you think your tax bill might be in 10 or 15 years.
Provided the correct trust type is used, there will also be no ongoing tax liability.
Is it Expensive?
In many cases, it can be a simple and cheaper option. If you work out how much would be paid in premiums over 10 or 15 years or 20 years until the day you die and compare this to the actual tax bill, you will be surprised.
Even if the premiums were say £100pm, that is £1,200 per year, £12,000 over 10 years and £24,000 paid in premiums over 20 years. Compare this cost to your tax liability.
Get a Quotation: Compare Life Insurance Premiums Now.
Premiums may also be a 'gift from normal income'
If the premiums paid do not affect or reduce your lifestyle in any way, they will be classed as a gift from normal income.
This means that the premiums do not use up your normal allowances.
10. Loan Trust
Inheritance Gift and Loan Trusts are a simple and convenient way to place any future growth on your assets outside the estate. You then start to restrict any future inheritance tax liability.
How does the Gift and Loan Trust work?
Gift - You set up a simple trust, either by a life insurance policy or by making a monetary gift to set up the trust, this gift could be as little as £1.
Loan - You then lend, with a formal loan arrangement, a monetary amount to the trust,e.g £50,000.
Loan Repayments - You can at any time receive regular repayments in the form of an 'income' or indeed lump sum repayments of the loan.
Growth - As it is a trust established for your beneficiaries, all growth is held in trust. It is not your growth and you have restricted your estate growing any further.
11. Split trust
In simple terms, a split trust is used when you establish a combined life insurance and critical illness protection scheme.
The benefits are broadly separated into elements: should you die or should you live.
The trust is split so that:
This type of trust may be suitable for:
Those who establish a combined life insurance and critical illness protection policy and wish to receive benefits should they develop a life threatening illness and have a valid critical illness claim but should they die, benefits are paid out in accordance with the trust.