Using Trusts Within Estate Planning

Trusts have been in the financial planning system for ages now. It is present within every family, and almost every individual looks forward to being a part of some trust when it comes to estate planning. However, trusts as a form of financial planning often succumb to various misunderstandings and misapprehensions.

A trust is set up with the aim of all the assets being managed by a single person or a group of individuals on behalf of the group. In most cases, the group usually consists of either close family members or close family members and extended family members. There are three parties in a trust’s establishment –

 

 

• The Settlor: The person who gives assets to the trust.
• The Beneficiary or Beneficiaries: The ones who benefit from the trust’s assets.
• The Trustees: The ones who manage the trust on behalf of all the beneficiaries.

This article will talk about trusts in estate planning, provide an understanding of how it works and how it can help beneficiaries achieve their financial objectives. Let’s discuss some common myths associated with trusts in estate planning and burst the bubble of misunderstanding.

The Only Motive Of A Trust In Estate Planning Is To Mitigate Inheritance Tax

1.  Trusts do mitigate the IHT. However, that is not the only motive. The rate that is frozen for IHT is 325,000 euros for over a decade now. If the trust receives this amount as a gift, it falls outside their estate after 7 years for IHT purposes.

 

The annual exemptions are frozen at 3,000 euros in general and 250 euros as a small gift allowance since 1984. Families must have an open discussion with their advisers about their end goal. Financial planning only succeeds when the objectives are clear. A trust is an effective estate planning tool that can help a person pass on assets to the next generation with efficient taxation.

• The main motive of a trust’s existence is easy management of the assets in situations like:
• The beneficiaries being too young to understand financial planning.
• The beneficiaries lack the capability to manage the assets.
• The beneficiaries do not have the time to manage the assets independently.
• The settlor wishes the beneficiaries to receive benefits from the trust in distributed intervals.

Another primary motive of a trust formation is to secure the inheritance and future for children from the first marriage in the event of a second marriage. It also helps protect family wealth from the risks of divorce, bankruptcy, or fraud.

Gifting Into A Trust Makes You Lose All Access And Control Of The Assets: 

This misconception depends on the type and intent of the trust. Various flexible trusts allow payments that the settlor receives in future years if needed. This structure is helpful for people who wish to have access to funds in the future. However, the settlor can also choose for the funds to be invested in the trust if they do not need the money.

Every settlor has control and a say in what happens next after the trust is formed and handed over to the trustees. As it is always set up with a clear purpose, the settlers can provide future instructions concerning their control of the funds. It is essential that we consider access for the beneficiaries. Since trusts are not subject to probate, the trust’s assets are passed onto the beneficiaries once the settlor passes away.

Forming A Trust Is The Slowest Way To Mitigate IHT: 

1.  Assets take 7 years to be exempted from IHT. However, suppose the gifts were made from a surplus taxable income and did not affect the settlor’s finances. In that case, they are immediately exempted from IHT as normal/regular expenditure, contradicting the myth. Trusts work similarly.

If the settlor passes away within 7 years and has no prior gifts in the account, the trust uses up the current nil-rate band, and the IHT is exempted there and then itself.

Family Members Are The Most Relevant Members To Be Trustees: 

1.  As we discussed in the introduction, most trusts are built with family members are the trustees. However, it is a myth that only family members are best suited to be a part of the trust as trustees. 

Trusts, as with many aspects of estate planning, have some degree of regulation with administrative burden. All the trustees are expected to be fully aware and understand the trust’s terms and conditions. They should regularly review taxes and administer all the requirements related to the trust and its registration. Trustees should also act fairly at all times, irrespective of the situation. 

However, trustees can also be non-family members if they fulfil the expectations mentioned. Families sometimes prefer using professional trustees to manage the trust who ensure that the trust is managed according to all the regulations. 

Every family needs a piece of solid financial advice when setting up a trust. Different trusts are subject to different tax rules, and mitigating IHT efficiently is beyond the control of people who are not financially sound. 

Conclusion: 

 Trusts are sound and legal structures; they have been rooted in history for centuries. They are used effectively to help families achieve financial goals and protect and preserve their wealth intergenerationally and manage estate planning for the future.