Trusts have always been perceived as the domain for wealthy people who could afford to pay lawyers to avoid paying tax on investments and protect high value assets. This is a misnomer. In reality trusts are an important facet of everyone’s financial planning if they have assets such as property or cash investments. They are also important to protect inheritors from legal difficulties or claims on the estate.

What is a trust?

Essentially a trust is a letter of wish or a document outlining the instigator’s instructions as to how an estate is to be distributed. Properly formed, a trust is an important financial planning tool that may avoid taxes and alleviate problems for inheritors. Once a trust is effected that asset, the subject of the trust is set outside their estate and is deemed to be no longer the property of the person who formed the trust, the settler.

Why would someone establish a trust?

In simple terms a trust allows someone the ability to make financial provision for heirs or beneficiaries and circumvent income, capital gains and inheritance taxes and liabilities. Trusts are also useful by way of protecting assets in the event of divorce, legal action, bankruptcy etc.

Situations where a trust would be useful:

How does a trust work?

There are several parties to a trust:

Settlor- Is the person forming the trust to whom the asset currently belong.

Trustees - There should be two trustees who are responsible for managing the trust and distribute its proceeds according to the wishes of the Settlor. One of these should be a professional (lawyer, accountant etc.).

Beneficiary- Are the people who will benefit from the proceeds of the trust in line with the wishes of the Settlor. Beneficiaries can be changed at anytime on instruction from the Settlor. In some cases the Settlor can also be a beneficiary.

Once the trust is formed then the asset that is now the subject of the trust is deemed to be no longer the property of the settlor and is now outside his estate. To some people the thought of this fills them with horror! Handing over property to the children might lead to endless worry whether they would try and sell the property and move them into an old people’s home! However the reality is different, as the trust would outline all possible scenarios to ensure the settlor enjoyed their last remaining years in comfort.

For UK residents IHT planning is essential. Currently when a person dies their assets transfer automatically to the surviving spouse with no liability to tax. When the survivor dies then there will be inheritance tax to pay based on the value of the estate. The estate is the total value of assets, cash, property, valuables, investments etc. If the total exceeds £255,000 then inheritance tax will be chargeable at 40% on the value above this.

e.g.	Estate valued at	£500,000
	Less Allowance	£255,000
	Total Taxable @40%	£245,000
	Total Tax payable	£98,000

By forming a trust and putting the assets into it then the estate would be outside the IHT threshold and therefore the heirs would save £98,000. This is on the assumption that the settlor survives for seven years after the trust was formed.

With rising house prices people are unaware of the problems facing survivors. £255,000 sounds a lot of money but with the average price of a house around £175,000 it wouldn’t take much to pass the IHT threshold and therefore have a liability to pay tax.

The Inland Revenue profit handsomely from people’s ignorance when a little forethought and planning can save substantial amounts of money.

To begin down the road to establishing a trust you must talk with your other family members to discuss the future. Decide what you want to happen in the untimely event of death, decide on who will inherit, how much and when. If the trust is to pay for school fees then advice should be sought on the likely costs and when they would begin to be incurred.

Once you have your wishes written down and agreed upon, then you have the basic format of a trust. All that needs to be done now is to ensure the correct form of trust is used to ensure that it is legal and suitable for the purpose. For this you should seek professional advice. All trusts are fairly standard in their framework, however it is essential that the correct trust framework is used.

Trustees should be appointed and at least one of these should be a professional. There are many professional trustee companies that can act on your behalf. The set up costs can be fairly costly, but the savings can be huge. Trustees will charge a nominal annual fee. They will always obey the letter of the trust and wishes of the settlor, which means that the wording and intentions of the trust are clearly stated and set out.

We can give specific advice and information as to how to form a trust and arrange for a professional trust company to undertake the formalities. To discuss this further please contact your local office.

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