Trusts and estate planning

When planning to leave an inheritance, two things are particularly important. You want to ensure that the right people inherit your wealth according to your wishes, and you (probably) want to minimise the amount lost to inheritance tax (IHT).

To achieve these goals you’ll need an up-to-date will, and you can also reduce the size of your taxable estate, for instance by making gifts during your lifetime. However, sometimes these measures alone may not be enough to achieve your aims. If so, your adviser may recommend that you use a trust.

What are trusts?

A trust is a legal arrangement in which a ‘trustee’ (which may be one or more individuals, or a company) keeps assets for the benefit of a ‘beneficiary’ (usually one or more individuals). The assets – usually money, property or investments – may eventually pass to the beneficiary (e.g. when he/she reaches a certain age) or may be held indefinitely to provide them with a certain benefit (e.g. a place to live or an income).

Trusts are often used when the beneficiary isn’t able to manage the assets themselves, for example if they are dependent children. Placing assets into a trust will also ensure that they are reserved for that particular beneficiary, rather than being spent or otherwise disposed of. Last but not least, trusts can be used to reduce IHT.

How can a trust reduce inheritance tax?

When you place assets into a trust, you are no longer their owner (the trustee is). The assets are therefore not part of your estate, and so will not be subject to IHT when you die.

A trust can also be used to help your beneficiaries pay an IHT bill. You can set up a special kind of life insurance to pay into a trust (so that it falls outside your estate) and cover the amount to be paid.

How do I set up a trust?

There are several types of trust, suitable for different purposes. For instance, you may want the beneficiaries to inherit as soon as you die, or only once they reach a certain age, or you may want a trust that holds on to the assets but only pays an income, and so forth. Generally you can tailor a trust to suit your particular circumstances, so ask your solicitor about which type will be most suitable.

You can set up a trust at any time, or write one into your will. Trusts set up as part of a will may have the executor as trustee, but you can choose another trustee if you wish. Remember that the assets you place into the trust will no longer be yours, so make certain you won’t need them anymore.

The laws surrounding trusts are complex, especially concerning inheritance tax. If you make a mistake when setting up a trust it could create a tax bill for you, so make sure you consult a solicitor whenever you're considering this option. Also ask a financial adviser about whether a trust is the most suitable solution, or if better alternatives are available.

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