Trusts can be an incredibly helpful tool when used correctly. They can be utilised for inheritance tax planning, family estate planning, tax mitigation, asset protection, to name but a few. However, we often find that people rely on common myths and misconceptions about trusts as a whole when deciding whether they are suitable for them, and these myths and misconceptions can be very misleading.
Before we dive into things, here’s a bit of background on Trusts –
Trusts can be created during your lifetime, via your Will and even by the beneficiaries in your Will, if they choose to execute a Deed of Variation. A Deed of Variation is a document that can be drawn up within 2 years of the date of death, which allows beneficiaries to alter their entitlement under the Will of the deceased person. A beneficiary could for example choose to set up a Trust for the benefit of their children, rather than receiving the inheritance themselves and it is then treated as if this came directly from the testator/testatrix.
Trusts, whether established during your lifetime or on your death, come in various shapes and sizes, which leads us on to our first common misconception: –
Trusts are one size fits all
It appears that a common belief is that a Trust is a one size fits all arrangement, whereas in reality, Trusts are a highly customisable tool that can be crafted in ways that are specific to each person’s requirements. Professional expertise is essential in ensuring that the Trust you are setting up is perfectly tailored to meet your personal circumstances and requirements
Trusts are only for the super wealthy
This is a comment we hear a lot but one that is not strictly true. Of course, there are costs associated with setting up and managing a trust, however, you could set up a trust with as little at £10 in it. These are known as Pilot Trusts and can be set up in preparation for assets to be transferred into in the future.
Trusts can also be used for asset protection, regardless of how big or small the asset(s). Trusts such as Life Interest Trusts can be ideal in scenarios such as second marriages, or when one spouse passes away and wants to ensure that some, or all, of their estate is protected for their ultimate beneficiaries, while also still providing for their widow.
Trusts are a tax avoidance scheme
The above is a very common misconception, normally in conjunction with point 2, however, Trusts are not a magical tax avoidance scheme. Can Trusts be utilised in effective tax planning in order to mitigate inheritance tax, yes, when used correctly, however, Trusts come with their own regimes and are subject to income tax and capital gains tax in similar ways to how a person is. Trusts even have additional tax charges such as 10-year anniversary charges and exit charges.
Furthermore, depending on the type of trust you are setting up, and how much you are gifting into the trust, you could potentially face a lifetime inheritance tax charge of 20% immediately upon gifting. This would be the case if you gift more than your available Nil Rate Band worth of assets into the Trust. The current Nil Rate Band is £325,000, so if you have made no gifts in the 7 years prior to setting up the Trust, then you can gift the full Nil Rate Band into the Trust without incurring a lifetime inheritance tax charge. If however, for example you gift £400,000 into the Trust, then you would be charged 20% on the £75,000 over the Nil Rate Band.
If spouses are both gifting into a Trust, both of their Nil Rate Bands can be utilised, so a total of £650,000 could potentially be gifted into the Trust without incurring the 20% lifetime inheritance tax charge.
You would then have to wait 7 years for this gift to be removed from your estate and to then be able to gift a further Nil Rate Sum balance in the Trust without incurring the lifetime tax charge.
I can give away my assets but still benefit from them
The government has a set of anti-avoidance legislation known as the Gifts with Reservation of Benefits rules. These state that a person cannot dispose of an asset e.g. gifting it to someone or into a trust, and retain a benefit from the asset, if their intention is to remove it from their estate, regardless of if they survive past 7 years.
An idea that clients bring forward regularly is along the lines of ‘’my friend told me to just put our home into a trust or into our kids’ names, continue to live there and then we wont be taxed on it when we die’’ and this is categorically wrong. If you are to gift your main residence either directly to your children, or into a Trust and intend to still live at the property for free, then the whole value of your home would still be included in your estate for inheritance tax purposes, regardless of how long ago you gifted it away. This can cause massive problems for your estate, since the asset doesn’t legally belong to you, so therefore your estate does not have control over selling it to pay for the possible inheritance tax bill your estate could be liable for. The only way around this would be to pay a full market rent for the time that you are still living in the property that you have gifted away, but this is often not something people wish to do.
The same applies for if you gift assets such as cash into a Trust. If you were to benefit from the Trust that you set up, this is known as a Settlor Interested trust, because you as the creator (Settlor) of the trust are still receiving an interest in the Trust, and therefore the value of your gift would still be included in your estate upon your death. If you want the value of the gift to be removed from your estate after 7 years, then you cannot receive any benefit from it.
As soon as you give away your assets, you lose control
Now this ultimately depends how you intend to gift your assets. If you are outright gifting an asset to someone, then yes you would lose control over what happens with that asset going forward. However, if you were to gift assets into a Trust, for the benefit of your chosen beneficiaries, you can still retain control over those assets during your lifetime, by appointing yourself as a Trustee of the Trust upon creation.
It is still important to remember that you cannot retain a benefit from the trust while also removing it from your estate, however, simply acting as a trustee does not provide you with any benefit from the Trust, it simply allows you to make decisions regarding the Trusts assets and how they are to be utilised and distributed amongst your pool of beneficiaries. This could be especially useful if for example you are wanting to benefit your children and/or grandchildren, but you don’t fully trust them to be responsible with the funds absolutely. You could opt to put your assets into the Trust and then when you feel it appropriate to use the assets to benefit your beneficiaries, you can make the decision to do so.
Considering a Trust ?
Due to many of the above points, people often do not fully consider Trusts when it comes to estate planning. You do not need to have a complicated family situation or be particularly wealthy in order to benefit from the use of Trusts. Trusts are a flexible and practical tool to be used for planning, protecting, safeguarding and efficiently managing your estate.
If you wish to explore more about how a trust might work for you and your family, please get in touch with a member of our team at enquiries@wellerslawgroup.com or contact Tara directly at tara.edwards@wellerslawgroup.com