What is a Trust ?
A trust is a binding arrangement under which a person gives money or property 'upon trust' to another person or persons, who are known as 'trustees'. That trustee can also be a beneficiary.
The trustees use the trust fund for the benefit of an individual or group of individuals, who are known as 'beneficiaries'. The trustees then have to look after the trust fund for the beneficiaries. These arrangements are usually set out in a trust deed that you make before you die, or in your Will, which means the trust will start on your death.
Trusts are not new. They have been used for over 600 years to protect and preserve family wealth within traditional estate planning structures. They are not just for the very wealthy. Trusts are now available for everyone wanting to protect their assets.
Property Protective Trust
✓ To avoid sideways disinheritance caused by owning property as joint tenants. This is where the surviving spouse/partner remarries, or owns property jointly with a new spouse/partner. Assets can pass outside of the original family unit and away from your children/beneficiaries, effectively disinheriting them as a result of death or divorce. Owning the property as Tenants in Common ensures that your share of the property (usually 50%) goes to your beneficiaries in due course, but only after the survivor has passed away.
✓ To ensure desired distribution of individual estates where couples come together later in life, both having children from previous relationships. In this situation they normally want to ensure that their new spouse/partner is provided for during their lifetime but that their respective share of the property ultimately passes down to their own children.
Discretionary Trust
✓ The trustees can decide which beneficiaries will benefit from the trust.
✓ None of the beneficiaries have an absolute right to all the money in the trust, nor the income that comes from it – they only have a potential right.
✓ The trustees may, at anytime, grant beneficiaries a sum of money from the trust, if they think that it is appropriate.
✓ Throughout the year, the trustees can choose whether or not to make payments to a child with a learning disability and how much to pay.
✓ Trustees can choose to buy things for a beneficiary’s benefit. This way, the payments can reflect your beneficiary’s needs at the time.
With a discretionary trust, your beneficiary is not technically ‘entitled' to money from the trust. This means that:
✓ The money or any other assets in the trust will not be taken into account when assessing whether they can receive means-tested state funding.
✓ The only thing taken into account will be the value of the payments actually made to a beneficiary.
✓ In addition, because it is a discretionary trust, the assets will not be treated as part of their estate on their death for the purposes of inheritance tax.
Nil Rate Band Inheritance Discretionary Trust
The Nil Rate Band is the amount you can give away during your lifetime or via your Will, (after you have passed away), before Inheritance Tax becomes payable, at a flat rate of 40%. The Nil Rate Band is currently £325,000 per person. In addition if you own a residential property, there is potentially a Residential Nil Rate Band maximum of £175,000, which is due to be fully implemented after in the year 2020.
Married Couples
Since 9th October 2007 married couples receive an automatic transfer of any unused portion of the first to die's Nil Rate Band. This works to automatically increase a married couple, or civil partners, joint IHT allowance to £650,000.
Unmarried couples
Unfortunately, there is no such concession for unmarried couples. If they leave all their estate to each other, then not only could there be an IHT liability on first death, but on second death only one Nil Rate Band is available to reduce the taxable value of the whole estate.
The Nil Rate Band Discretionary Trust works to allow the survivor access to the deceased's assets. At the same time creating a debt on the survivor's estate. This in turn reduces the taxable value of the survivor's estate. Therefore the IHT payable is reduced by up to £130,000.
Disabled person's trusts
✓ This is a special type of discretionary trust that can be created for a person who is incapable of looking after their affairs or is entitled to disability living allowance at the highest or middle rate.
✓ Under the terms of this trust, your child with a learning disability would be named as the 'primary beneficiary' of the trust, and other beneficiaries, such as your other children, would be named in a separate class of beneficiaries.
✓ The primary beneficiary will be entitled to the income of the trust, although this should not affect their entitlement to state benefits.
✓ Tax advantages are available to this type of trust whilst it is running, but when your child dies; the trust will be taken into account for inheritance tax purposes.
Life Time Trust
✓ Avoiding the delay of probate the process which is often time consuming and stressful. It takes about 6-9 months but often takes longer.
✓ Protection against sideways disinheritance after first death. For example the surviving spouse re-marrying a new partner and your loved ones being disinherited.
✓ Protection in the event of the early death of a first line beneficiary; a Trust cannot marry.
✓ Protection in the event of divorce of a beneficiary; a Trust cannot get divorced.
✓ Protection against creditors or the insolvency of a beneficiary; a Trust cannot be made bankrupt.
✓ Protection against excluded or unreliable beneficiaries.
✓ Avoidance of Inheritance Tax in a beneficiaries’ estate. For example if your children are already financially independent, leaving money to them directly may result in being taxed at 40% in the future.
✓ A long-term (up to 125 years) financial planning tool for 4 or 5 generations.
✓ Protection from creditors / means tested benefits (if done for the right reasons and at the right time) for you and your beneficiaries e.g. if any beneficiary lost their job and was reliant on state benefits.