Deciding what happens to your estate after your death is a complicated affair, and one that nobody relishes. However, it’s something that demands your attention, and once you’ve got things sorted you’ll feel a big weight off your shoulders.
For many people, preparations consist solely of making a will which stipulates who gets what, and that’s it. Some people will think about trusts, but see them as something for the rich only. Trusts can actually make sense for people with even modest assets. But what is a trust?
A trust is simply a legal agreement whereby a person or group of people take responsibility for assets of various kinds for the benefit of someone else. When talking about trusts you will come across plenty of legal language, so you definitely need to know the following terms:
Settlor. This is the person who set up the trust. In other words: you.
Trustees. The trustee or trustees are the people who will manage the trust.
Beneficiaries. This is the person or persons who will benefit from the trust.
You can put money, property, investments or other assets into a trust, and you can also include life insurance.
A trust can be set up during the lifetime of the settlor, or it can be set up on their behalf as set out in a will. A trust can also be established through intestacy laws (where there is no will).
Why set up a trust?
Now we’ve answered ‘what is a trust’ let’s look at why you might want to set one up.
Trusts have a number of benefits when it comes to inheritance planning, and some reasons to set up a trust include:
Helping to avoid inheritance tax. The current threshold for inheritance tax for the 2020/21 tax year is £325,000. So if your estate is valued at more than this, then everything over the threshold is subject to tax at 40%.
Putting property or other assets into certain types of trust can mean they won’t be affected by inheritance tax before beneficiaries receive them. However, trust rules are complicated, and you often have to survive for seven years after making a transfer into a trust for this transfer to be exempt from inheritance tax. If you are thinking of setting up a trust to help reduce inheritance tax bills, make sure you seek professional advice.
Providing an income for the beneficiaries. A trust can be used to provide an income for those who benefit from it. The trustees could dispense at a certain rate, or at certain times, the money. For example, a trust might be used in this case to provide for children who aren’t yet old enough to manage their finances themselves.
But don’t think that trusts simply lock up assets and the taxman can’t touch them. Depending on the nature of the trust then the trustees and the beneficiary will be liable for some form of tax, and of course setting up and managing a trust all costs too. The latest data shows that in the tax year 2017/18, there were 149,000 trusts and estates which made self-assessment tax returns.
Types of trust
There are several types of trust but they all fall into two main categories. Knowing the difference is important for how you plan.
Revocable trusts. These types of trusts can be changed while you’re still alive. This means that if your circumstances change and you need to access the assets, or you wish to change who benefits from them, then you can. Revocable trusts also let you benefit from the asset during your life, though they have less tax benefits when it comes to inheritance.
Irrevocable trusts. In this form of trust whatever asset you put into it is then permanently taken out of your estate and you cannot do anything to reverse this. This form of trust is usually best for people planning for inheritance tax.
Setting up a trust
Trusts are not simple wrappers that you put around an asset; they’re complicated legal agreements and so have to be precise, and put together with great care.
Setting up a trust should always be done with the help of a solicitor who is an expert in trusts and inheritance planning. As you’d expect this comes with significant costs, but if you want the trust to work as intended then it may be money worth spending.
Before you set anything up take time to consider who will be the trustees. Remember that this person or group of people will be responsible for the running of the trust, and so they should (no pun intended) be trustworthy. Being a trustee is a long-term commitment and can involve a lot of work, so make sure they’re aware of exactly what is involved. Most people opt for between two and four trustees.
The alternative to asking friends or family to be trustees is to get a solicitor or a bank to act as trustee. This can often provide greater peace of mind as you know that the trust will be managed impartially, however it will cost and others feel more comfortable with people they know handling things.
This is just a basic overview of what a trust is. As with anything financial, it pays to get as much expert information and guidance as you can before making any decisions.