The growing benefits of Trusts in modern estate planning

When one of our female clients recently sold a valuable property, she had high hopes for what she could achieve with the proceeds. Not only did she want to generate an income for herself, but also she planned to put money aside for her children to minimise inheritance tax (IHT), considering the impact of the 2024 Budget’s tax changes.

With our guidance, she set up a type of Trust called a Discounted Gift Trust with the Life Office and a solicitor. Exactly as she requested, the Trust gave her a fixed annual income for life subject to the trust not being fully depleted. And the assets put in Trust for the children would be exempt from inheritance tax after seven years, in line with government allowances, as she hadn’t made any other significant gifts.

As the available toolbox of options for passing on wealth shrinks, Trusts are proving increasingly useful. For hundreds of years in wealth management and estate planning, Trusts have allowed individuals to pass assets between generations and manage tax.

While seemingly complicated, Trusts can solve common family issues. For instance, you can use them to tailor estate planning to the intricacies of second marriages and blended families. You can use them to support younger family members while ensuring that they spend the money wisely. And you can deploy them for inter-generational wealth transitions.

What's a Trust?

What’s a Trust and how does it work? The definition of the word Trust is a belief that someone or something is honest and sincere.  A Trust, in the wealth planning space is a structure that is managed by a group of people called the Trustees, who manage the Trust property for the benefit of the Beneficiaries.  The Trustees are “trusted” to look after the property.  That’s why as long ago as the Middle Ages this type of legal vehicle was used in the UK by people to pass on their wealth.

A Trust is a separate legal entity. It lets you pass on your assets – such as cash, property or investments – for the benefit of others without giving them direct control.

Notably, as long as the Trust was set up long enough ago, assets held in Trust generally don’t form part of your estate when you die. That means they won’t be subject to IHT, providing you long enough after transferring the assets in trust.

When establishing a Trust there’s a lot for you to consider. Not least, are you happy to transfer legal ownership of your assets to a Trust? Are you comfortable appointing trustees to manage the Trust? Who will act as your trustees? What do you want the Trust to achieve? And are you happy to commit to the long-term legal and tax responsibilities?

Types of Trust

Depending on what you’re looking to achieve, there are several types of trust to choose from depending on your access requirements, for example, Loan Trusts and Discounted Gift Trusts such as the one set up for the lady managing the proceeds of her property sale. 

They can be set up as either Bare Trusts, where you specify at outset who will be the beneficiary, or Discretionary Trusts, where you want to retain some flexibility on who will benefit, name classes of beneficiaries, e.g. all my children and their dependents. We can advise you about what best suits your circumstances.

Bare Trusts

We regularly support the set up Bare Trusts to pass wealth down to young relatives, normally grandchildren. You can transfer assets into a trust where they’re administered by trustees of your choosing. Beneficiaries under a Bare Trust have the right to take control of the Trust assets as they become adults – officially 18 in England and Wales; 16 in Scotland.

What’s the advantage of a Bare Trust? Quite simply that any income or capital gains generated by the investments within it belongs to the beneficiary and is taxed accordingly. If the beneficiary is a child, typically they have little or no other income, the tax liability could be nothing or minimal if the Trust was set up by a grandparent.

Discretionary Trusts

Discretionary Trusts may be used for long-term estate planning where flexibility if important. Your trustees ultimately have discretion to decide what to distribute to beneficiaries and when. Typically, though, you guide the trustees through a letter of wishes.

The advantage of a Discretionary Trust lies in its ability to adjust to changes in circumstances. For instance, your trustees could support your beneficiaries financially in times of need, such as illness or a career break. Alternatively, funds could be withheld during a divorce to help safeguard family wealth.

Gifts into Discretionary trusts are Chargeable Lifetime Transfers.  Under current rules, you can place up to the £325,000 nil rate band IHT threshold into a Trust without triggering an immediate tax charge. If you’re married, or in a civil partnership, you and your spouse may be able to gift  up to £650,000 into the Trust between you.

The benefits of Trusts

Why use a Trust in estate planning? A Trust’s original purpose was to ensure that those gifting into Trust had some control on how Trust property was used.  It can provide protection in divorce or bankruptcy.  That remains a key benefit and trusts perform an invaluable role in estate planning, safeguarding wealth for future generations and ensuring your wishes are respected – even after death.

Today, though, a lot of people use trusts to try for their tax efficiencies. For instance, setting up a Bare Trust for a minor and transferring assets could provide a tax-free income to be put towards school or university fees.

When it comes to Discretionary Trusts, they are commonly used for mitigating IHT by giving assets to the Trust and starting the clock ticking for IHT purposes without handing over control of the assets to your beneficiaries.

Talk to us

In summary, Trusts can be used for crafting clever estate planning strategies. Returning to the example of our female client who sold her property, the Discounted Gift Trust delivered her perfect outcome – an income for life, subject to the trust not being fully depleted while mitigating IHT for the next generation. 

This is just one example of how people are turning to Trusts at a time when other options for tax planning are more limited. The one drawback of Trusts is their complexity, which is why it’s wise to talk to us about your ambitions and what can be achieved.

If you would like to know more about the benefits of Trusts and the role they could play in your wealth plan, please speak to a Brown Shipley Client Advisor, or download our Trusts Guide.

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