5 Practical Uses for a Trust

16 May 2024

Estate Planning / IHT

There is a common misconception surrounding trusts that they’re complex and only of use to the very wealthy, often for tax motivated purposes.

Whilst trusts can be very useful when it comes to inheritance tax planning, there are a number of more practical, non-tax motivated benefits to employing trusts in your family affairs.

Here are five valuable uses of trust arrangements, that can benefit not just the very wealthy, but all families.

Avoiding the need for probate

Probate is the process of administering a deceased person’s estate – essentially, it’s the legal right to deal with someone’s property, money, and possessions when they die.

For simple estates, probate can take a few months, but for larger or more complex estates, it can sometimes take years for the deceased’s property to be administered and legal title to be assumed by the beneficiaries of the Will.

If you have a complex estate and you’d like to ensure your loved ones start receiving the benefit of certain assets promptly after your death, gifting them into trust can help with this.

Assets gifted into trust are not strictly included in your estate, and so probate is not necessary, assuming the trustees and beneficiaries of the trust are set up correctly.

Care must be taken however as there may be tax implications of gifting to a trust – professional advice should always be taken first.

Reducing your IHT liability

As mentioned above, assets in trusts do not form part of your estate for inheritance tax, so making certain gifts into trust can be tax efficient.

For example, this may be particularly effective if your estate is worth over £2 million, as you being to lose your Residence Nil Rate Band (RNRB) of £175,000 at this value. Gifting assets into trust in order to reduce your total estate value below this can mean the RNRB is preserved and save IHT of up to £70,000.

There are consequences to navigate though, for example:

Gifts made within 7 years prior to death will still be chargeable to IHT, although potentially at a reduced amount presuming you live longer than 3 years after the gift.
The Gift with Reservation of Benefit rules (GWROB) prevent someone from gifting an asset away to avoid IHT, but then still enjoying use of that asset.

Preserving family assets in your Will

Interest in Possession trusts (IIP) can be effectively integrated as a part of your Will to ensure your assets pass to the people you want them to.

For example, you’d likely want your spouse to benefit from your property after your death.

But say they remarried later on – upon your spouse’s death, the property would pass to their new spouse, not your children.

IIP trusts can be written into your Will such that your spouse can benefit from your assets during their lifetime, but upon their death the assets revert to someone else, for example your children.

The maintenance of young children

If a parent were to settle assets on trust for a child under 18 years old, the trust would be ‘settlor-interested’, and the parent would still be taxed on the income as if it were their own.

However, the settlor-interested rules do not apply to grandparents.

This means that any generous grandparents that want to gift assets to provide for a grandchild’s future can do so.

The terms of the trust can be bespoke, dictating that a certain amount of income is given to the grandchildren each year, or dictating an age at which any assets are passed to the grandchildren absolutely.

On ill health or disability

It may be that a relative has just been diagnosed with a degenerative illness, such that they will no longer be able to manage their financial affairs in the future.

They are able to ‘self-settle’ assets into trust for themselves, with their family members being the trustees taking care of their affairs.

A disabled person’s trust (DPT) can be established as an interest in possession trust (giving the disabled beneficiary the right to trust income as it arises) or a discretionary trust (trustees have a choice over income distribution).

Having an IIP can restrict certain Government benefits which a disabled person could claim.

For this reason, most DPTs are set up as discretionary trusts because a discretionary interest does not constitute an entitlement to income.

This can be particularly useful in cases of medical negligence, or injury that results in an insurance payout.

Certain government benefits are not payable when an individual holds a certain amount of savings – by having the payout in a trust, entitlement to these benefits is preserved.

Sounds good?

Trusts can be a valuable tool not only when it comes to reducing your inheritance tax liability, but also when it comes to protecting family assets and ensuring your vulnerable loved ones are looked after.

Getting in touch with us

If you’re interested in any of the above or would like to discuss how trusts could benefit you, then please get in touch with Christie or call us on 01634 731390