What is a Trust?
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. Trusts can be set up after death (via a Trust Will) or, which this section will cover, during your lifetime to take immediate effect.
The Trust documents will state who is responsible for looking after the assets (the Trustees), who is to benefit (the Beneficiaries) and any conditions the Trustees or Beneficiaries must follow. The separation of the legal ownership and beneficial ownership (which were once inseparable) is the unique characteristic of the Trust.
What Types of Trusts are available?
Family Trust (Interest in Possession Trust)
Family Trusts are a lifetime settlement used to provide for a surviving spouse and future generations by protecting the family home. The Trust works by transferring the legal ownership of the property to the trustees for them to hold for the eventual enjoyment of the chosen beneficiaries.
Placing assets into Trust 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 Trust also affords protection against potential claims under the Inheritance Family Provisions legislation following the death of the settlor.
The client can transfer the property into Trust whilst continuing to enjoy the use and benefit of it for the rest of their life. In the case of the family home, the client can still retain a right to reside in the 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.
Tax Considerations for Trusts
Trusts can be used to minimise and Estate’s Inheritance Tax (IHT) liability. 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 (for an individual), 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. A 6% IHT exit charge will also be due when the Trust comes to an end.
Any income received from the Trust, for example the client or another trustee / beneficiary withdrawing assets or cash, will be taxed at their personal rate of tax and potentially Capital Gains Tax (CGT). Alexander Legal Services is regulated to only provide legal advice and cannot provide comprehensive tax, or financial, advice.
Making a Trust is a complex matter and will usually be done over two or three appointments. The first 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 can meet to discuss the documents or we can proceed for it to be signed and witnessed, similar to how a Will is signed and witnessed.
Alexander Legal Services charges £1,950 for properties worth up to £325,000 (for individuals) or £650,000 (for couples) which are mortgage free. Properties worth over the IHT threshold and/or subject to a mortgage will need to be quoted.