Trusts
A trust is a legal arrangement for managing assets. There are different types of trusts, and they are taxed differently.
In a trust, assets are held and managed by one person or people (the trustee) to benefit another person or people (the beneficiary). The person providing the assets is called the settlor.
Different kinds of assets can be put in trust, including:
- Cash
- Property
- Shares
- Land
Trusts are set up for several reasons, including:
- To control and protect family assets
- When a beneficiary is too young to handle their affairs
- When someone cannot handle their affairs because they’re incapacitated
- To pass on assets while a settlor is still alive
- To pass on assets when a settlor dies (a ‘will trust’)
- Under the rules of inheritance if someone dies without a will (in England and Wales)
Settlors
The settlor decides how the assets in a trust should be used – this is usually set out in a document called the ‘trust deed’.
Sometimes the settlor can also benefit from the assets in a trust – this is called a ‘settlor-interested’ trust and has special tax rules.
Trustees
The trustees are the legal owners of the assets held in a trust. Their role is to:
- deal with the assets according to the settlor’s wishes, as set out in the trust deed or their will
- manage the trust on a day-to-day basis and pay any tax due
- decide how to invest or use the trust’s assets
If the trustees change, the trust can continue, but there must always be at least one trustee.
Beneficiaries
There might be more than one beneficiary, like a whole family or defined group of people. They may benefit from:
- the income of a trust only, for example from renting out a house held in a trust
- the capital only, for example getting shares held in a trust when they reach a certain age
- both the income and capital of the trust
Setting up a trust
Trusts can be set up at any time or written into your will. You can find a solicitor to help you set up a trust.
A solicitor will guide you through setting out:
- what the assets are
- who the trustee and beneficiary are
- when the trust becomes active
Choose people you can rely on to be your trustees and make sure they’re happy to take on this responsibility. You should have at least two trustees but can choose up to four.
A Protective Will Property Trust is only effective if the tenancy is severed. If joint owners have contributed unequal funds towards the purchase of a property, when the tenancy is severed the proceeds of sale or beneficiaries share will be proportionate to the amount invested and go to the correct people.
If a severance hasn’t taken place and one of you dies the property will automatically pass to the other owner. Severing the tenancy avoids this and your share can be protected for someone else.
When there is a severance and property protection trust your choice of beneficiaries will not be affected even if the other owner changes their mind about their beneficiaries.
The subject of a spouse remarrying after being widowed is considered taboo, but it does happen and when it does it invalidates any existing will. The new spouse would inherit whatever your spouse owned should they predecease them, meaning your estate could pass to your spouse’s new partner and not your choice of beneficiary. Severing your tenancy is the best way of protecting your share of your estate for your loved ones.
Threats to your estate – Care costs
Care costs may threaten your estate but it is against the law to deliberately evade paying for your own care. You can however avoid paying for the care of your spouse or partner.
- The average cost of residential care in 2010 was £481 per week
- The average cost of residential care in 2015 was £562 per week
- The average cost of residential care in 2019 was £651 per week
This means that in 2019 a year of residential care would cost £33,852!
A year of nursing home care would cost £46,436!
Who would you want to inherit – your children and your family, friends or someone else? You need to ensure your estate goes where you want it to. Many people think that they can simply give all their money away when they are still alive – but this can have massive capital gains tax implications.
How we can help?
Your home is your lifetime’s work – protect its value
- Specify who is to inherit your share of your home
- If the surviving partner then needs care, your share cannot be taken to fund the care costs
- If the surviving partner remarries, your share will not be passed to another family
- The surviving partner can live in the home for as long as they wish
- They can sell the home and use the money to buy a new home
How it works?
The property protection trust is set into the wills of both home owners. If you pass away first your share of the property is passed into trust (protecting it). Your share is protected from the care costs of the existing partner. If the surviving partner remarries, your share will not go to another family. The surviving partner can live in the property for as long as they wish. Your share of the property is then passed to beneficiaries when the surviving partner dies.
A few hundred pounds to protect thousands, the affordable way to protect your share of the property.
A Property Protection Trust includes:
- Severance of tenancy
- Complex Mirror Will writing service
- Correspondence with Land Registry
Price per person = £450
Total price = £900
What is an asset protection trust?
An asset protection estate is a tool for managing your estate to make sure your assets go where you want them to after you die. An asset protection trust is set up during your lifetime, and assets in the trust are distributed quickly to the beneficiaries once you pass away. Asset protection trusts are a form of life interest trust but overlap with trust wills as the trust will be named in your will.
How does an asset protection trust work?
A trust means that you split up the legal ownership of an asset up from the enjoyment of that asset. The trustees get the legal ownership, and the beneficiaries get the benefit. The idea is that by transferring your assets into this type of trust during your lifetime, they stop being part of your estate, and this form of ownership continues after your death.
Why would I want to protect my assets with an asset protection trust?
There are multiple ways your estate can be eroded after your death meaning that your assets are not distributed to your loved ones as you would want. These include:
- Your spouse remarries so that any assets or property they inherited from you pass onto their new partner and their children, rather than your own children.
- Your spouse becomes bankrupt, and their assets are used to pay debts.
- Family members make an application to contest the will
- Assets pass onto in-laws ahead of your children, especially following a divorce.
- If your spouse needs to move into a care home, their long term care fees will be assessed from their total assets, including inheritance, meaning this money is not passed onto your children and other beneficiaries.
There are numerous pros to setting up this type of trust arrangement:
- Probate is not necessary for the assets in the trust, so the administration of the property can be dealt with more quickly and grant of probate fees can be avoided after your death.
- Settlors get to control inheritance procedures and who will inherit joint assets that otherwise would have passed directly to your spouse.
- You can appoint trustees who will impact what happens with the trust, so can ensure it is in line with your purposes. You also decide who is the estates beneficiary.
- A possible source of income for the individual
- Side effects include, individuals can avoid care costs, though deprivation of assets cannot be the sole basis of setting up the trust.
- You can still do what you want with the assets while you are alive
- Having a trust may have tax advantages. There will be an inheritance tax exemption if the trust value is below the threshold. This is more cost-effective than if you made an outright gift to your children. You will pay less income tax on the money you make off the investment of trust funds.
You can make provision for your spouse to continue to live in the family home after you are deceased while still passing family wealth onto your children.
What is a nil-rate band?
The nil-rate band is the amount of money in an individual’s estate that is exempt from inheritance tax (IHT). The nil-rate band currently stands at £325,000.
The nil-rate band can be transferred to a spouse upon first death.
What is a nil-rate band discretionary trust?
A nil-rate band trust is a form of discretionary trust used to transfer assets or funds to an individual’s beneficiaries without having to pay IHT. A nil-rate band discretionary trust, or any discretionary trust for that matter, are incredibly useful for ensuring that children do not miss out on their inheritance due to sideways disinheritance.
What is sideways disinheritance?
Sideways disinheritance is the term used for when children from a previous marriage lose out on their inheritance due to their parent(s) remarrying without properly securing their estate.
Here is an example:
David and Karen are married and own a home together. David and Karen have two children, Jim and Mike.
Karen passes away without having done any form of estate planning. All of Karen’s estate, including her share of the house, is passed to David.
Later down the line, David remarries a woman named Susan.
David passes away without planning his estate.
All of David’s estate passes to Susan in its entirety, including the home.
Jim and Mike are upset about this situation and seek legal advice. Jim and Mike are told they have no claim to their late father’s estate.
This is a prime example of why Estate Planning is incredibly important. A nil-rate band discretionary would’ve completely mitigated this situation.
How would a nil- rate band discretionary trust have helped?
If David and Karen had properly planned by getting professionally written wills and trusts drafted, they could have ensured that Jim and Mike receive their inheritance even if the surviving spouse did remarry.
A trust of this kind would have first required David and Karen to sever their tenancy, which prevents their share in the home transferring to one another upon death. They would both then put their share of the home into a trust with Jim and Mike as the beneficiaries. They would also have to choose trustees that manage the trust, these trustees would be in charges of the assets within the trust but cannot benefit from them themselves.