Trusts: Where they may add value to your financial plan

Trusts can be a useful financial tool as you seek to create an income and plan how to pass your estate on to loved ones. However, do you fully understand what they are and why they might be useful to you?

First, exactly what is a trust?

A trust is essentially an agreement that allows a third party (known as the trustee) to hold assets on behalf of a beneficiary or beneficiaries. So, if you were to place assets in a trust (making you a trustor) your beneficiary wouldn’t have direct control over the assets, the trustee would. There are many instances where this can be useful.

However, it isn’t always as straightforward as that. There are several different types of trusts and which one you should use will depend on your circumstances, goals and priorities. Among the types of trusts that you may consider are:

  • Bare trusts: This is the simplest type of trust and is often used to pass assets to young people. The beneficiary has the right to all the capital and income of the trust once they are over 18.
  • Interest in possession: This is where the trustee must pass on all trust income to the beneficiary as it arises, less any expenses, but does not have the right to the assets themselves. Most interest in possession trusts naturally end at some point, so you will need to set out what happens here. For example, the trust may pay out an income to your spouse when they’re alive, with the capital then passing to your children.
  • Discretionary trust: This type of trust gives more control to the trustee. They will be able to make certain decisions about how the income generated is used. This may include how much is paid out, which beneficiary will receive payments and impose conditions on the beneficiary.

Whilst the above three options are the most commonly used types of trust, it doesn’t mean one of them might be the right option for you. If you’d like to discuss how a trust might be used to add value to your financial plan, please contact us.

4 ways a trust can be useful

1. Inheritance Tax planning

If your estate is liable for Inheritance Tax (IHT), a trust may be able to help minimise the bill.

IHT may be liable on an estate with a value that exceeds £325,000. If you’re able to make use of the Residence Nil-Rate Band this may add a further £150,000 (rising to £175,000 in 2020/21) to the threshold. With the standard IHT rate standing at 40%, it can be a significant bill. However, there are often things you can do to reduce this, including using particular types of trust.

Your estate consists of all the assets you own, including property, savings and investments. A trust can effectively remove some assets from your estate, therefore, reducing the overall value and potentially reducing the amount of IHT that may be due. If mitigating IHT is your main aim, you, your spouse and your children under the age of 18 won’t be able to benefit from the trust.

Keep in mind that some types of trusts are subject to their own tax regimes, so it’s important to fully understand the options available before proceeding.

2. Passing assets to minors and vulnerable individuals

As you start thinking about your wider estate plan, you may want to make provisions for children or vulnerable adults. This may include paying for the education of grandchildren or creating an income for a disabled adult that is unable to work. A trust can help you do this without placing responsibility into the hands of the benefactor.

Depending on the type of trust you use, you may set out certain conditions for how the income or capital is used and distributed, or you may decide to give the trustee control of this.

3. Protecting your financial legacy

If protecting your financial legacy is important, a trust can give you greater control. Whilst a will allows you to state who will receive your assets when you pass away, it doesn’t allow you to tie certain conditions to them. As a result, you can’t be certain how the assets will be used or if it’ll align with your wishes.

By using a trust, you can and have peace of mind that your wishes will be followed even after death. You can, for example, set out how much will be distributed, when and to whom. Alternatively, you may want to set out certain conditions that need to be met before a beneficiary will receive income or capital.

4. Protect your future

As you start to think about your later years, you may be worried about the potential need for care and how you’ll pay for it. If you need care you may not have the mental capacity to make decisions about your finances, and may not want someone to make them for you. Placing money earmarked for potential care costs in a trust means you take control now. Should care not be needed, you’ll be able to leave the trust to your loved ones.

If you’d like to discuss trusts further in relation to your plans, please get in touch.