Trusts are legal entities that offer a strategic way to manage assets for the benefit of beneficiaries. They provide a mechanism for asset protection and distribution, which can be particularly useful in minimising exposure to inheritance tax liabilities.
In Tax Planning: Inheritance and Use of Trusts, Barry Jefferd went through the different types of Trust that exist, the tax implications of establishing a Trust, what setting up a Trust entails and how to determine whether a Trust might be suitable for your client.
Types of Trusts
There are various types of trusts, each with its unique characteristics and benefits. A 'bare trust' or 'naked trust' is a simple form where assets belong to the individuals. For those who do not have full mental capacity to manage their finances, a 'disabled trust' can be established. An 'Immediate Post Death Interest (IPDI) trust' or '1825 trust' allows someone to leave half of their house to their spouse, giving them the right to live in the residence rent-free, but without any claim to the capital should the house be sold.
Another common type is the 'relevant property trust', which includes discretionary trusts or life interest trusts created during someone's lifetime. The key selling point of a discretionary trust is that any beneficiary is only a potential beneficiary - they can request but not demand funds from the trust.
Establishing a Trust
Setting up a trust involves creating a trustee deed, which acts as the rule book for the trust. The settlor, the person who creates the trust, can also be a trustee, managing the trust's assets. This dual role offers a significant advantage as it allows the settlor to retain control over the assets while providing for the beneficiaries. However, it's important to note that if a settlor becomes a beneficiary, most tax advantages will be lost.
Trusts can be an effective tool for tax planning. For instance, after seven years, assets placed in a discretionary trust are considered outside the settlor's estate, potentially reducing inheritance tax liabilities. However, it's crucial to remember that you don't get any Inheritance Tax (IHT) exemptions or holdover relief in a trust.
Moreover, the value of an asset when it goes into a discretionary trust is considered for tax purposes, not its value at the time of the settlor's death. This can be beneficial if the asset appreciates over time. However, the settlor and their spouse cannot benefit from the trust; only other listed beneficiaries, such as children, grandchildren, or even a widow, can.
Trusts offer a flexible and strategic way to manage assets and minimise inheritance tax liabilities. However, they require careful planning and legal guidance to ensure they are set up correctly and meet the intended objectives.
To watch the full session, please click here. The following key areas are covered:
- The importance of proactive, but careful Inheritance Tax planning for everyone
- Common Inheritance Tax planning strategies, use of reliefs, and how these can be employed over the course of an individual’s lifetime, and on death
- The use of Trusts to minimise exposure to Inheritance Tax liabilities, including types of Trust, establishing a Trust, and the associated tax implications
- Our role as advisers in respect of Inheritance Tax planning
- How to determine whether a Trust is the right strategy for your client
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.