Inheritance trust funds – make sure you do it for the right reason

David Haughton
Financial Planning
David Haughton

When we hear the phrase ‘Trust Fund’, many of us think of the kind of vehicle which enables children of the mega-rich enjoy lives of luxury. But in fact, trusts can be a hugely useful way of organising your assets and ensuring that your wishes are carried out – in a tax-efficient way – after your death.

David Haughton

Essentially, inheritance trusts are a way of protecting assets – usually property and investments, but it could be any kind of material asset – and passing them on to your beneficiaries when you die. They are therefore an important element of estate planning.

Whether you set up a trust while you are still alive (a lifetime trust) or do it through your will on your death, the assets you choose to transfer into the trust no longer form part of your estate, but are instead held on behalf of the beneficiaries by the trustees.  These can be family members, professional advisers, or other trusted individuals.

All sorts of assets can be put into a trust, the most common being bricks and mortar property, investments and cash.  It is possible to put only a proportion of an asset (e.g. the family home) into the trust and to retain control of the rest.

Although some people will tell you that trusts are all about minimising inheritance tax, in fact the main benefit is the level of control you, as the instigator of the trust (the ‘settlor’), have over who benefits from your assets, how and when.  The trustees are legally bound to ensure that your wishes are carried out.

This could be, for example, supporting grandchildren through education, stipulating that beneficiaries will only receive assets when they reach a certain age (to avoid youthful squandering), protecting the interests of children from a previous marriage, or ensuring that your assets are not lost to the family in the event of a future marital breakdown.

There can be some tax benefits from setting up a trust, but this is not a given, and arguably shouldn’t be the reason for establishing one.  Whilst assets in a trust no longer count as part of your estate for inheritance tax purposes, there is likely to be a tax charge to the beneficiary when the assets or income from them is paid out of the trust.

The tax situation is complex, which is why it is crucial to involve a financial planning expert when considering setting up a trust, as well as taking legal advice.

There are also costs involved in setting up the trust in the first place, and potential ongoing costs if professional trustees are nominated (which is often a good idea given the complexity of trust law).

Generally speaking, inheritance trusts are relevant for larger estates with assets which exceed the nil-rate inheritance tax bands, people with complicated family arrangements (perhaps through more than one marriage) and those who have specific wishes which might be difficult to accommodate in a traditional will.

Those thinking of setting up a trust would do well to start by deciding what the broad aims of the trust are, what assets are going to be included, who the beneficiaries are going to be, and who the trustees might be.  After that, seeking expert advice is vital.  

Trusts can be a great way of ensuring that your wishes for what happens to your assets after your death are respected.  When set up for the right reasons, and structured properly, they can be a valuable vehicle for helping to ensure the financial future of your loved ones.

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