Trusted Financial Advice
A Guide To Trusts
‘Ring-fencing’ assets to protect family wealth for future generations
You may want to consider putting some of your assets into a trust for a loved one. Trusts are a way of managing wealth, money, investments, land or property, for you, your family or anyone else you’d like to benefit.
They are used to protect family wealth for future generations, reducing the inter-generational flow of Inheritance Tax and ensuring bloodline protection for your estate from outside claims.
The way in which assets held within trusts are treated for Inheritance Tax purposes depends on whether the choice of beneficiaries is fixed or discretionary.
There are lots of different types of trust and some will allow you to ‘ring-fence’ the money or property so that it sits outside of your estate when you die.
The most popular types of trust commonly used for Inheritance Tax planning can usually be written on either an ‘absolute’ or a ‘discretionary’ basis and the taxation treatment is very different for each.
A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Once the trust has been created, a person can use it to ring-fence assets.
Trusts terms:
- Settlor – the person setting up the trust.
- Trustees – the people tasked with looking after the trust and paying out its assets.
- Beneficiaries – the people who benefit from the assets held in trust.
Trusts are a complicated area and can be expensive to set up. Some are subject to other tax regimes, so you should get authorised and regulated specialist advice.
Extending the scope of the trust register
Deadline for non-taxable trust registrations announced
When you put assets in a trust, they are under the control of an appointed person or persons called ‘trustees’. The trustees then manage the trust according to your instructions, even after your death.
Bare Trust
Bare Trusts are also known as ‘Absolute’ or ‘Fixed Interest Trusts’, and there can be subtle differences. The settlor – the person creating the trust – makes a gift into the trust, which is held for the benefit of a specified beneficiary. If the trust is for more than one beneficiary, each person’s share of the trust fund must be specified.
Discretionary Trust
Wide class of potential beneficiaries
With a Discretionary Trust, the settlor makes a gift into trust, and the trustees hold the trust fund for a wide class of potential beneficiaries. This is known as ‘settled’ or ‘relevant’ property. For lump sum investments, the initial gift is a chargeable lifetime transfer for Inheritance Tax purposes.
Flexible Trusts with default beneficiaries
Default beneficiaries set up in the settlor’s lifetime
Flexible Trusts are similar to a fully Discretionary Trust, except that alongside a wide class of potential beneficiaries, there must be at least one named default beneficiary. Flexible Trusts with default beneficiaries set up in the settlor’s lifetime from 22 March 2006 onwards are treated in exactly the same way as Discretionary Trusts for Inheritance Tax purposes.
Split Trusts
Family protection policies
These trusts are often used for family protection policies with critical illness or terminal illness benefits in addition to life cover. Split Trusts can be Bare Trusts, Discretionary Trusts or Flexible Trusts with default beneficiaries. When using this type of trust, the settlor/life assured carves out the right to receive any critical illness or terminal illness benefit from the outset, so there aren’t any ‘gift with reservation’ issues.
