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The answer is probably quite simple: because you want to make absolutely sure that your money is being managed in the best, most efficient way possible – for your benefit, as well as for your family’s benefit.

But many people are reluctant to set up a trust. Doing so can add a significant layer of complexity to your financial affairs. And as many of our clients know, they are definitely not a “one size fits all” solution.

According to Investment Quorum’s Director of Private Clients Nick Rolf, however, trusts are one of the most valuable financial planning tools – despite also being one of the least-well understood. If used properly, they can help you reduce a hefty inheritance tax bill, as well as offering other benefits as part of an integrated and coordinated approach to managing wealth. Let’s take a look at some of the types of trust available and why you might consider establishing one.

What is a trust?

Put simply, a trust is a legal relationship in which the owner of property or assets entrusts it to another person who must then keep it solely for a third party’s benefit. You might like to think of it as a sort of treasure chest which contains valuable contents belonging to someone else. The person setting up the trust puts cash or other assets into that chest… and then locks it shut.

Who are the people involved in a trust?

There are three key types of people involved in a trust: the settlor, the trustees and the beneficiaries.

The settlor is the party who entrusts the property – the party who puts the assets into the trust for the benefit of beneficiaries. Settlors tend to be individuals or couples. The trustees are the people to whom the property or assets are entrusted – the people who hold the keys to the treasure chest and have the power to unlock it. They are the ones who control and oversee the trust. They can add to or remove any of the assets inside, and they can distribute its contents in accordance with the terms of the trust. Anybody can be a trustee – provided they are over the age of eighteen and have full mental capacity. Finally, beneficiary of the trust is the party who benefits from the arrangement. For example, they may receive money from the trust or be entitled to live in a property. With certain trusts, the trustees have some discretion over the ways in which the beneficiaries can enjoy these benefits.

Trusts and tax

Trusts are somewhat idiosyncratic when it comes to income tax, capital gains tax and inheritance tax. The allowances and rates vary depending on the type of trust and how it benefits its beneficiaries. Investment Quorum can talk you through the various types of trust and what the tax implications of setting one up will be.

The different types of trust

Different trusts exist for different purposes. And each one is subject to different tax rules. It’s important to know what type of trust you want to set up – the kind of trust you choose will depend on what you want it to do. In the UK, some of the most common types include:

Bare trusts

Assets in a bare trust are kept in the name of a trustee. However, the beneficiary is entitled to all of the trust’s income and capital at any time, provided they are at least eighteen. So the assets earmarked by the settlor will be passed directly on to the intended beneficiary.

Bare trusts are often used to pass on assets to young people – the trustees look after them until they are old enough.

For example, say you decide to leave your sister a sum of money in your will. That money is held in trust. She is entitled to both the money and any income it earns, and can also take possession of any of the money whenever she wants.

Interest in possession trusts

These are trusts where the trustees must pass on any income to the beneficiary as soon as it is earned (minus any expenses).

For example, you might create a trust for all your shares. The terms of the trust say that when you die, the income from those shares goes to your husband for the rest of his life. When he dies, the shares will pass to your children. Your husband is the beneficiary and has an ‘interest in possession’ in the trust. He is not, however, entitled to the shares themselves.

Discretionary trusts

With discretionary trusts, the trustees are allowed to make certain decisions about how to use any income from the trust, and sometimes the capital.

Depending on the agreement made, trustees can decide how much gets paid out (income or capital), which beneficiary receives payments and how often payments are made. They can also decide whether any specific obligations or requirements should be imposed on the beneficiary.

You might decide to set up a discretionary trust as a means of putting aside assets for a future need – like a grandchild who you think may need more financial help than their siblings later on in life, or beneficiaries who are not able to deal with money themselves.

Why should you set one up?

Maintain a measure of control

When you set up a trust, you retain some level of control over the assets inside it. For example, you may marry for a second time having already had children in your first marriage. Ideally, you would want to make sure that your second spouse was provided for and taken care of the rest of their life, after which the money would pass to your children from your first marriage. A trust would enable you to do this.

Provide protection

Trusts protect assets for their intended beneficiary. For example, an outright gift to a beneficiary who is then declared bankrupt could be lost. However, if the gift is placed in a trust under which a beneficiary is not entitled to the income or capital, then that gift is less likely to be taken into account.

Save inheritance tax

Trusts are a useful way to save inheritance tax, doing away with the need to make an outright gift to another person. If you place assets in a trust from which you cannot benefit, after seven years, the assets will no longer be considered part of your estate for inheritance tax purposes. And any growth in the assets will also be deemed to fall outside your estate.

Avoid probate delays

Normally, before any assets can be distributed in accordance with your wishes as expressed in your will, any probate fees and inheritance tax must be paid first. However, the executors of your will cannot access your assets until probate has been granted. What this means is that they will need to find the money to pay these fees elsewhere.

But since a trust is like a treasure chest, separate from your estate, your trustees will have immediate access to any money inside it and can use it to pay the probate fees and inheritance tax.

The next step

Given their practicality, flexibility and the many financial benefits they offer, trust funds have become an extremely popular way of structuring people’s financial affairs. However, the complex nature of many trusts requires a crystal-clear understanding of the legal relationships and obligations involved.

If you need help setting up trust, remember that Investment Quorum has extensive expertise and experience in helping individuals and families to protect their wealth. So do talk to us sooner rather than later about such things.


Nick Rolf is the Director of Private Clients.
Nick spent a number of years working on global equity markets in London and Hong Kong and is passionate about investment advice and tax planning for private clients and trustees. He has expertise in estate and trust planning, retirement planning and pensions, and individual and corporate protection.


 

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