What is a Trust?
Trusts have been used by families for centuries to protect wealth.
A Trust is a formal transfer of assets (whether they be property, shares or just cash) to a small group of people (usually two or three) known as ‘Trustees’ with instructions that they hold the assets for the benefit of others. If the Trust is to be made in your lifetime to take immediate effect, then it is usually evidenced by a Trust deed and often referred to as a ‘settlement’. If it is to be created on or shortly after your death then the Trust rules must be set out in your Will.
Whether by lifetime settlement or by Will, the Trust instrument will state who is responsible for looking after the gifted assets (the Trustees), who is to benefit (the Beneficiaries) and any conditions or rules that the Trustees or Beneficiaries must adhere to. The separation of the legal ownership and beneficial ownership (which were once inseparable) is the unique characteristic of the Trust concept. The Trustees are the legal owners, but the beneficial owners are the Beneficiaries.
What type of Trusts are available?
Property Protection Trusts (PPT)
Used to ‘ring fence’ assets providing peace of mind that they are protected to provide for chosen Beneficiaries. Property Protection Trusts are a lifetime settlement used to provide for a surviving spouse and future generations by protecting the assets from third party creditors.
The Trust works by transferring the legal ownership of the Trust asset to the Trustees for them to hold for the eventual enjoyment of the chosen Beneficiaries.
Placing assets into an PPT protects them from sideways disinheritance and potential claims upon the divorce or bankruptcy of a Beneficiary. Furthermore, probate fees can be mitigated or avoided altogether as the assets within the Trust are not treated as part of the estate for probate purposes. A PPT also affords protection against any potential claim under the Inheritance Family Provisions legislation following the death of the settlor.
The settlor can transfer assets into a PPT whilst continuing to enjoy the use and benefit of the asset for the rest of their life. In the case of the family home, the settlor and their spouse can still retain a right to reside in the Trust property. The equity of a property which is subject to a mortgage can be placed within a Trust and secured by a restriction against the Land Registry title.
In certain circumstances, a PPT provides flexibility for the Trustees, at their discretion, to maintain one or more Beneficiaries with income or capital depending on their individual needs.
Trusts can be used to minimise the inheritance tax (IHT) payable when an Estate is being administered, however depending on the value of your assets, making a Trust may incur a lifetime IHT charge. For example, if the assets you are placing in Trust are worth over £325,000, then a 20% IHT entry charge will be due. A 6% IHT anniversary charge will also be due every 10 years after the Trust has been set up. Finally, a 6% IHT exit charge will be due when the Trust comes to an end.
A tax efficient example of a Trust would be placing a property worth £250,000 into Trust because the value of all your assets are worth £400,000. An Estate worth £400,000 would usually incur an IHT charge of 40% on anything over £325,000. By placing the property in Trust, the value of the Estate is reduced to £150,000, well under the IHT threshold.
Making a Trust is a complex matter, though we make the process as straightforward as possible. It will usually be done over two appointments. The first appointment will be a fact-finding exercise to give us all the necessary information for your Trust to be drafted. Once the Trust document has been drafted, we will return for it to be signed and witnessed, similar to how a Will is signed and witnessed.
What will we need to know?
Ahead of our fact-finding appointment, we will send an instruction questionnaire to you. We will need to know who owns the assets subject to the Trust, how they are owned, the value of the assets and who you would like to benefit from the Trust.
Contact us today for a no obligation appointment to discuss making a Trust.