Inheritance Trusts – The Who, What and When

Inheritance TrustsDo you have significant assets that you would like to pass on to your children in the future? One thing that you must consider before drawing up a will is the implications of inheritance tax (IHT) on family members.

Let us imagine a scenario where your asset amounts to more than £325,000 (this is the minimum IHT limit in the UK). A partner, children, or any other member of your surviving family named in your will will inherit the asset after your death, but they will be required to pay 40% in taxes.

If you want to prevent your loved ones from feeling the brunt of tax laws, you need to set up an inheritance trust during your lifetime. As part of estate planning, certain tools such as wills, trusts, and powers of attorney can help you make thoughtful decisions about your assets and legacy. While most people are familiar with wills and POAs, trusts are sometimes misunderstood or overlooked. In this guide, we’ll walk you through everything you need to know about inheritance trusts, helping you make informed choices for your family’s future.

What is Inheritance Trust?

A trust is a legal arrangement and works differently from other estate planning methods such as wills and LPAs. When you set up a trust, you entrust your money, assets, and properties to someone else (trustees) so that a third party (beneficiary) can benefit from them. A trustee has the same rights as the owner and can make decisions about the estate for its betterment.

When you put your assets into a trust, you no longer own them, and they cannot be considered when calculating inheritance tax. Although you will no longer be referred to as the owner, you may designate yourself to the board of trustees.

There are usually multiple kinds of trusts that can be created in the UK-

Bare Trust – This is one of the most common type of trusts. Once the beneficiaries become adults or mentally capable, they become entitled to the assets in the trust.

Discretionary Trust – The trustees usually have complete control over the assets in the trust and use their discretion to distribute the asset or income among the beneficiaries.

Interest in Possession Trust – The trustee will need to pay the entire income from the trust to the beneficiaries. They can deduct any viable expenses.

Accumulation Trust – The trustees have the power to accumulate any interest or income generated from the estate and add it to the original capital. They can also use their discretion to disburse income to beneficiaries.

Apart from these above-mentioned trusts, some other trust formats in the UK are mixed trusts, non-resident trusts and settlor-interested trusts. It’s best to discuss the advantages and disadvantages of each trust with an accountant and a legal advisor to make an informed decision.

It is important to remember that trusts are also subject to taxes. Depending on the type of trust you’ve created, you’re liable to pay income tax.

Who are the People Involved in a Trust?

There are usually three types of people involved in a trust-

Settlor: the person who puts their asset in a trust

Trustee: usually multiple people form a board of trustees and manage the trust

Beneficiary: the person(s) who’ll receive the income from the trust

This can be an excellent legal tool for protecting the assets of minor children or vulnerable family members, like a loved one with special needs or aged parents.

When appointing a trustee, you must choose someone who you can expect to do the best for your beneficiaries.

When to Create a Trust?

Trusts can be set at any age. It is preferable to start at an early age, as this can help you to prepare for any uncertainties in the future. You set up a trust in the following cases:

To protect a family asset and create a legacy; in certain trusts, the beneficiaries can enjoy the income or the asset but not sell or invest it. This helps protect your family’s legacy.

When you have young children or family members who are incapacitated and cannot make decisions on their own.

If you want to ensure a particular friend, relative or charity benefits from the income from your asset, setting up a trust can be the right option. Without a trust or will, the estate is passed under the laws of inheritance and is usually stuck in probate for years.

You can save a significant sum in inheritance tax and pass on your asset while you, the ‘settlor’, are still alive.

In Summary

Trusts are exceptional legal tools that can be extremely beneficial when used in the appropriate manner. However, trust laws are complex, and it’s always best to consult an expert lawyer to guide you through the process.

Your lawyer will also help you choose the right type of trust format, trustee and assets you want to add along with other important decisions that you need to make.

It’s important to spend time considering your decisions before setting up a trust as it can have a far-reaching impact on not only your assets but also the lives of your loved ones.