When to trust in Trusts

From bare to discretionary and all the various options in between, there are two fundamental details to remember about trusts: they tend to be fairly complex and once put in place they can’t be reversed.

However, these two realities should not put you off considering if they are right for you. In the popular imagination, fuelled in no small part by period drama and fiction, trusts are there to protect ‘old money’ from what are often portrayed as feckless beneficiaries. In the real world of the 21^st century, they can be used very effectively to legally shield money from harsh tax treatment, as well as protecting children and vulnerable people.

Trusts can be useful in managing wealth in a number of different ways, but at their heart is the principle of ensuring the right people get access to the money you set aside for them at the right time. So it’s worth taking a look at a few of their modern day uses.

These can broadly be broken down into two levels: simpler trusts and more complex trusts. It is worth emphasising that, despite their name, even the simpler trusts will also require some form of specialist advice and management to get right.

Simpler trusts

Life insurance is usually put in place should the worst happen to you. It’s there to ensure your family doesn’t face financial hardship in the long term if you die but there is a critical short-term aspect to this, too.

Writing your life insurance policy in a trust means your family doesn’t have to deal with excessive admin and probate delay when they are at their most vulnerable.

An unexpected death can lead to an estate being tied up by probate, which can take up to a year to conclude and leave your family without access to the vital funds they need to cope in the midst of grieving.

Writing it in trust takes the policy out of your estate for inheritance tax purposes and means it can be paid out to beneficiaries without waiting for probate and is tax free.

Providers will routinely provide paperwork to set up these trusts when you take out such a policy but they can be moved into a trust at any time you want.

The simplest type of trust is a bare trust, sometimes also called a simple trust. They are often used by grandparents who want to leave set sums of money to grandchildren who are still minors. The money is held in trust until the child turns 18, or 16 in Scotland and, while held in trust, the child is deemed to be the ‘beneficial owner’ of the funds, which are also outside the reach of inheritance tax.

Perhaps the most common form of trust is discretionary, which names beneficiaries, but that’s where it stops. In practice, it is a way for you as the trustee (the owner of the wealth) to remove your assets from your estate for inheritance tax purposes while still retaining control of that wealth.

However, there are tax implications. The trustee can only add up to the nil rate band limit (currently £325,000) into the trust every seven years without facing a tax liability. Above this, there is an inheritance tax charge of 20%.

The trust is also checked once a decade (all trusts must be registered with HMRC’s Trust Registration Service) for inheritance tax liabilities or when a transfer out is made to a beneficiary.

More complex trusts

As the name makes plain, a vulnerable person trust is created for someone who needs protecting and is unlikely to be able to manage their own finances. Vulnerability for the purposes of this type of trust is limited to bereaved children under 18,  who have lost a parent and individuals who meet specific disability criteria. 

If they do meet the criteria, then the trust ensures the beneficiary’s needs are met while protecting their eligibility for means-tested government benefits and safeguarding their assets. 

It has special dispensations when it comes to inheritance tax, income tax, and capital gains tax. It is more complex because typically it must be created by a solicitor. 

If you have children from a previous marriage and are considering marrying again, an interest in possession trust could prove useful. 

This trust is designed to ensure your spouse-to-be is taken care of in the event of your death – but also ensures assets are subsequently passed on to your existing children i.e. those from your first marriage. This is typically found in wills and requires careful legal arrangement. 

How to go about setting up a trust

While these are just some examples of how trusts can help when managing your assets,  it’s not an exhaustive list, for example, there isn’t space in this post for the function of charitable trusts for philanthropy.

However, if any of the trusts we have outlined chime with your circumstances, it is worth considering whether or not they could become an effective part of your portfolio planning, especially if you are concerned about the current prevailing trends of rising liabilities and tax changes.

As we made clear at the start, trusts are complex and setting one up isn’t something to tackle without specialist professional help, which is where we come in. We can draw on considerable experience in all things trusts and know the valuable role they can play across the financial advice spectrum.

Get in touch:

Trusts could play a valuable role in protecting your wealth, reducing tax, and ensuring your assets are passed on in line with your wishes, but their complexity means getting the right advice is essential.

Please contact your Foster Denovo Partner or email advise-me@fosterdonovo.com or calling 0330 332 7866 for more information.

Please note:

This article is for information purposes only and does not constitute advice or a personalised recommendation. It is based on our understanding of current and proposed legislation, which may change.

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future. We recommend that the investor seeks professional advice on personal taxation matters. The Financial Conduct Authority does not regulate will writing, taxation and trust advice.

Note that life insurance plans typically have no in cash value at any time and cover will cease at the end of term. If premiums stop, then the cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.

Foster Denovo Limited, is authorised and regulated by the Financial Conduct Authority. Registered office: Foster Denovo Limited, Ruxley House, 2 Hamm Moor Lane, Surrey, KT15 2SA