Hargreaves Lansdown’s Sarah Coles explains the role of trusts in estate planning and minimising Inheritance Tax.
Sections
Trusts and dogs
Who is involved
There are three important people (or groups of people) relating to every trust. The first is the person who hands over the money or assets in the first place (known as a settlor): once they’ve put the money into the trust, they no longer own any of it.
The second is the person (or people) who look after money in the trust (known as trustees). They legally own everything in there, but they have a responsibility to use it purely in the interests of the third group – the beneficiary or beneficiaries, who at some point will benefit from everything in the trust.
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Why use trusts?
It begs the question of why you wouldn’t just hand over the gift to the person who you want to benefit, and there are a few reasons for this.
The first is to do with control. You might want to use the trust to ensure a beneficiary doesn’t have control when it’s not appropriate – perhaps they are too young or you’re not sure how they would handle large sums of money.
You may also want to ensure money in the trust is handled as you want after your death. If, for example, you and your partner both have children within other relationships before you met, you might want to leave your estate so that it benefits your partner during their lifetime, but protects the interests of your own children too. It means, for example, that if your partner remarries, the money cannot pass to their new family.
And the other reason for setting up a trust is Inheritance Tax, because essentially when you put the money into the trust, you are giving it away.
This means that after seven years it is counted as being out of your estate for Inheritance Tax purposes. In some cases, it’s that straightforward: in others, in return for saving this tax you’ll take on a bucket load of complexity and a number of other taxes.
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Straightforward and simple
Junior ISAs and life insurance
It’s also important to consider the Junior ISA as an alternative, because it is tied up until your child turns 18, and free of tax regardless of who contributes to it. There’s an annual limit (which this year is £4,260), but if you’re planning to give away sums below this level, it may be ideal.
Another free and easy trust is writing a life insurance policy in trust – which costs no more than taking the policy out itself.
If the policy is in trust, when you die, rather than the proceeds going into your estate, they go straight to the beneficiaries. This means that there’s no risk that the proceeds will be subject to Inheritance Tax. It also means the beneficiaries don’t have to wait for probate, because they get the cash straight away.
There’s also a trust that may well be in your life already that you have no idea about, because many workplace pensions are written in trust. This isn’t going to affect you on a day-to-day basis, but it will make a difference after you die. In order to make sure trustees pay any death benefits or untouched pension pot to the right person, you need to complete a nomination of beneficiaries form.
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Complex trusts