5 Things You Need to Know About Trusts

Insight | by Stephen Kiggins
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Whilst writing a will can ensure that those closest to you are taken care of financially when you’re no longer around, if you need to personalise your estate plans further, reduce tax, and ensure the money is well-spent by the beneficiaries, creating a trust can provide a number of valuable options.

A trust is created when you give assets to people you choose (trustees), to hold for the benefit of others (beneficiaries). You can set up a trust while you’re alive or have one created when you pass away.

So what are the benefits and how important are they in the estate planning process? Here are 5 things you need to know.

1. Trusts aren’t only for the super rich

Many people assume trusts are only for the super wealthy or those with extremely complex estates. But in reality, you don’t need to be worth millions to use them to your advantage. Trusts can come in useful for a whole number of reasons.

A trust can be used to hold your pension, make provisions for care costs, or manage an inheritance for your partner or children. For example, you may decide to leave money to your children or grandchildren, but only grant them access to it once they reach adulthood or have achieved certain life milestones such as getting engaged, having kids or starting their own business.

2. Trusts can offer a lot of flexibility

When it comes to setting up a trust, one size certainly doesn’t fit all. Thankfully, there are a number of different types of trust, making this a flexible way to personalise your estate plan.

Bare trusts – Often created for children so they have access to the assets within the trust when they’re older. Assets within this type of trust are held in the trustee’s name, but beneficiaries in England and Wales will have a right to access the trust’s contents once they turn 18.

Settlor-interested trusts – Usually set up for spouses or civil partners. You might use this type of trust to help the beneficiary during times of financial need, whether they need help funding an emergency, covering costs while out of work, or paying for care.

Discretionary trusts – While some trusts simply release capital to a beneficiary, discretionary trusts are more complex. The trustees have complete control over the assets and income they generate. They dictate when the assets are paid out, how frequently, and will outline rules to prevent reckless spending. Some people choose this type of trust to pass assets down to younger generations, selecting their adult children as the trustees and grandchildren as the beneficiaries.

Accumulation trusts – Trustees can add to the trust’s capital and have control over the payouts.

Interest in possession trusts – The beneficiary will receive an income from the trust immediately, but they can’t control the assets that provide that income. They’ll need to pay income tax on the money they receive.

Non-resident trusts – Specifically for trustees who do not live in the UK for tax reasons.

Mixed trusts – If you’d like to take advantage of the benefits from more than one type of trust, a mixed trust may sometimes be required. For example, a mixed trust might combine the income aspect of an interest in possession trust with the complexities of a discretionary trust.

3. Trusts can protect vulnerable loved ones

If you’d like to leave money to children, elderly relatives or loved ones with learning disabilities, a trust may be more suitable than a will.

You’ll be able to appoint trustees to take care of the trust fund on the beneficiary’s behalf. It’ll be their job to ensure the money is put to good use, whether you want to cover the cost of care, support or living costs.

A trust might even help to protect vulnerable loved ones from scams and financial abuse. Whereas if they inherited all the money at once and kept it in their bank account, it could be accessed (and misused) quite easily.

4. Trusts can be tax-efficient but the rules are complex

The way your chosen trust is taxed will depend on the type you select.

The assets within it are likely to be subject to inheritance tax and this may need to be paid at various points in the trust’s lifecycle. For example, inheritance tax is often payable when:

  • Assets are put into a trust
  • The trust reaches its 10-year anniversary of being set up
  • Assets are transferred out of it
  • The trust ends
  • Someone passes away and a trust is included as part of their estate

Income tax may be payable. For example, bare trust beneficiaries are responsible for paying tax on any income they receive from the trust. They must tell HMRC about the income via a Self Assessment tax return.

Capital gains tax can also be charged when assets within the trust have increased in value or been transferred out of the trust.

Although trusts aren’t completely tax free, they can often help you reduce capital gains and the amount of inheritance tax payable when you pass away.

We can help you weigh up your options, stay on top of legislation and plan your estate in a tax-efficient way.

5. Trusts can be surprisingly easy to access

Beneficiaries often worry about the money they inherit being tied up in a trust. They fear that they won’t have control over it and will have to follow very strict rules that might not be suitable for their lives in the future.

If you’d like to prevent reckless spending while also providing your loved ones with flexibility, this is something you can prepare for when planning your estate.

When appointing trustees, it’s a good idea to select people who know the beneficiary and care about their changing needs, while still understanding why a trust can be more suitable than a straightforward will. That way, as long as all the trustees agree that the money should be released to a beneficiary, it can be.

Planning your estate can be overwhelming

Few people enjoy talking about money, and even fewer enjoy thinking about death. But by planning ahead and getting your affairs in order, you can leave a lasting legacy and make life easier for your loved ones.

Get in touch with our team today to find out how we can help you with your financial planning and use of trusts to facilitate the best possible holistic outcomes for your family and your beneficiaries.

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