The taxation of trusts hasn’t changed much over recent years, but the world of wealth protection has moved on. So, what role do trusts still play in family financial arrangements?
Over the coming weeks, I will be sharing a series of blogs highlighting the benefits of trusts, the potential issues and some of the alternatives. In this first article, I’m taking a look at the basics of trusts.
What is a trust?
Often used to shelter assets from inheritance tax and to protect assets for future family benefit, there are three types of people involved in creating a trust:
- The settlor – the person adding assets to the trust
- The trustees – those responsible for managing the trust and adhering to the terms of the trust
- The beneficiaries – those who will receive the financial benefit of the trust
Each trust has the capability of being unique but, usually, they are a variation of the following (and sometimes a mix of the two):
- Discretionary – the settlor gives some guidance to the trustees, but it is for the trustees to decide who benefits from the trust assets and income, and when, and
- Life interest – one or more beneficiaries will be named as having a right to income, and the assets of the trust will pass to beneficiaries on a specific event (e.g. attaining a certain age or on the death of an individual)
Trusts can offer two main benefits – tax efficiency and asset protection:
Tax efficiency
Broadly, a trust will provide tax efficiency in three areas: inheritance tax, capital gains tax and income tax. With considered planning, it’s possible to transfer funds or assets into trust without giving rise to a lifetime inheritance tax charge, a capital gains tax charge and to improve income tax efficiency for the family in the future.
Asset Protection
Though trusts can be tax-efficient vehicles, it’s possible to achieve the same (if not better) income tax and inheritance tax efficiencies by simply gifting the asset outright. But this would result in assets being placed directly in the control of individuals.
Many, therefore, opt for a trust as it adds a layer of asset protection over the assets held in the trust, which can be beneficial in the following circumstances:
- Vulnerable individuals (minors or disabled beneficiaries)
- Beneficiaries with their own exposure to Inheritance Tax at 40%
- Where there are concerns over financial claims on the beneficiary’s estates (e.g. divorce or bankruptcy)
- For beneficiaries who cannot manage, or are poor at managing, wealth
This is not an exhaustive list, but it gives an idea of the type of circumstances where a trust may be worth considering.
If you have any enquiries regarding trusts, please get in touch with our specialists in our private client team or call 0333 123 7171. My next blog will look at the different alternatives to trusts.
