Trusts don’t need to be complicated

There are a number of trusts with various names. However, in simple terms, a trust is a means for an individual (The Settlor) to have their assets held by another (The Trustee) for the benefit of a third person or persons (The Beneficiaries). Instead of your house being owned by Joan Smith, for example, it would be owned by the Joan Smith Family Trust. Trusts have been around since the days of the Crusades so they are in no way a new concept.

One significant benefit of having a trust is that it allows your assets to be handed down through the generations to your beneficiaries at a time most convenient to them – rather than at a time when the beneficiary may be going through a divorce, experiencing financial difficulties or living abroad in an unfamiliar tax jurisdiction for example.

An easy way to understand the concept of trusts is to think about car financing which operates in a similar way. If Joan Smith has a car on a personal contract purchase (PCP) plan, she will not own that car. The legal owner would be the finance company. However, the car still does its job perfectly well and is available any time Joan wants to use it. It doesn’t really matter to anyone that she is not listed as the legal owner.

A trust plays a very important part in estate planning and, as each individual has different wants and needs, each trust has to be set up to reflect their requirements.

When is a trust useful?

The following are the most common situations in which having a trust ensures that your assets go to the people you love the most:

Divorce

45% of marriages in the UK end in divorce. In these situations, a married child’s ex-spouse could be in receipt of up to half of any inheritance you leave to your child outside of a trust.

Bankruptcy

Assets within a trust are protected from the bankruptcy of any of the beneficiaries. Therefore if, for instance, one of your children is involved in a business that fails leaving them exposed to bankruptcy, your inheritance is protected from bankruptcy obligations.

Marriage after Death

It is perfectly understandable that after the death of a loved one, the widow/widower may enter into a new marriage. Their new spouse may have children from previous relationships. Without a trust, your assets could pass to your spouse’s new partner after your spouse’s death.

Long-Term Care

As a result of living healthier lifestyles and medical advancements, we are now living longer, with the life expectancy of those born today being 80 years. Consequently, there is a greater need for long-term healthcare and local authorities are looking for ways to fund it.

After the death of someone who has been in care, the local authority will look to their estate to meet costs, (unless their assets, including their home, total less than £23,250), and will look to sell their house to reclaim these costs.

For trusts set up at a time when the need for care is not reasonably foreseeable, and avoiding the potential costs of care is not a significant reason for setting up the trust, it is possible that your assets may be protected from the costs of long-term care.

Inheritance Tax

We are all required to pay Inheritance Tax (currently set at 40%) when we die, on any assets we own over the value of £325,000. This is known as the Nil Rate Band. In recent years, the Government introduced an additional Nil Rate Band specifically for those who own their own home and pass it on to their children. Known as the Residential Nil Rate Band, this is set at £175,000, meaning tax is paid on the value of our homes above this amount.

For married couples, this means that, jointly, they could have a Nil Rate Band of up to £1M. We have seen significant property price rises in the past few years - imagine, if this trend continues and the Nil Rate Band remains unchanged, what impact this could have on your own estate!

A carefully constructed trust, alongside effective financial advice, may help to reduce the level of inheritance tax payable on your estate, providing you survive for seven years after the trust has been put in place.

There is not a one-size-fits-all trust. It is important to take advice about which trust is the most suitable for you.