As people get more wealthy, they often think that they need some family trust. But, as with anything in finance and life, a trust should be considered if it adds benefit somehow.
A trust is a way of managing assets (money, investments, land or buildings) on behalf of someone else without you having complete control over them. For the purpose of this information, let’s assume that you are the person who wants to explore trusts.
There are three main parties involved:
1) Settlor: The person who creates the trust (you)
2) Trustees: The party that legally owns and manages the assets
3) Beneficiaries: The people or person whom will benefit
Trusts can be used for many reasons, but a simple rule to remember is that the more difficult the access is for the settlor, the fewer Inheritance Tax benefits.
When thinking about trusts, the correct starting point is to figure out what your motivation is.
Ask yourself the following questions:
Firstly it’s essential to establish your domicile; this affects everything when it comes to estate planning. For more information on domicile when it comes to estate planning, visit our Inheritance Tax Section. An experienced financial planner will also be able to help.
So why is it important that the questions mentioned above should be considered?
DOMICILE
OBJECTIVE
Common misconception: A trust can be used to plan effective UK IHT while retaining capital access. But retaining access to capital would be considered a “Gift with Reservation” for UK-domiciled clients. Non-UK residents who want to move to the UK can do so, but they need to identify the right trust and the assets that are allowed and not allowed to be held within the trust.
If a UK-domiciled individual has access to the trust funds, this is considered part of their estate, which means that they are subject to UK IHT regardless of whether or not they have benefited from it.
For the benefit of IHT, an outright made to a trust needs to exclude the donor/settlor; however, specific structures like Loan Trusts and Discounted Gift Trusts allow you to benefit in future by an amount agreed at the outset. These types of hybrid trusts are often used by wealthy individuals and can be very powerful tax planning vehicles.
FIXED OR FLEXIBLE BENEFICIARIES
This decision will typically be based on succession planning or tax reasons. There are two ways HMRC views transfer into a trust:
1) Bare Trusts have fixed beneficiaries. Transfers into trusts are Potentially Exempt Transfers. A PET must have a fixed beneficiary that cannot be changed. The amount transferred is exempted from UK IHT if the donor dies within seven years. No IHT is payable at the time the money is transferred, regardless of its amount.
2) Flexible beneficiaries are available for discretionary trusts. The trust transfer is subject to Chargeable Lifetime Transfers. Flexible beneficiaries will have the option to transfer into the trust as a CLT. The IHT charge will apply if the transfer value exceeds the donor’s nil rate band (currently at £325,000).
In most cases, a discretionary trust is considered a relevant property trust. IHT charges can also be applied when:
* Property is transferred out of the trust (Exit charge)
* each 10-year anniversary
UK domiciles have to figure out whether reduced tax and no ongoing charges are more important than the trustees having the flexibility to make amendments to the beneficiaries or benefit themselves.
Tax may not be as important if the settlor has a non-UK domicile. However, the settlor/donor might still be concerned about who will ultimately benefit from the trust. Therefore, in certain circumstances, it may be more important for flexibility to have discretionary beneficiaries.
Suppose you are concerned that your children may squander their inheritance. In that case, you should lean towards a flexible trust so that the trustees can determine whether or not your beneficiary is financially and mentally capable of using the distribution per your original wishes.
Discretionary trusts also have drawbacks as in certain circumstances; the beneficiaries can instruct the trustees to dissolve the trust property and hand over the assets if:
On the other hand, if you have paid into a fund a savings plan specifically for a child’s future education needs, the plan may be better placed in a trust with fixed beneficiaries so that only that child can benefit.
Fixed beneficiary trusts are also useful in jurisdictions that have forced heirship rules. They can be used to provide for people who otherwise would be excluded from the estate’s benefits. This area of planning requires careful consideration.
OTHER POINTS
It can be costly and time-consuming to dissolve a trust, usually involving a court. Should a court be the only option, you should be aware that all supporting documents evidencing the original intentions for the trust planning will be reviewed. It is highly unlikely that a trust would be declared null and void just because your circumstances have changed.
Most life companies known very well with expats have a wide range of ‘off the shelf’ trust deeds which are free to use with their products.
As always, the HMRC website is a great resource https://www.gov.uk/trusts-taxes.
Summary.
Estate planning is one of the more complex areas of financial planning. Usually, anyone who’s at the trust panning level of wealth has acquired a large number of assets, potentially in different countries. On top of that, there are many trusts that can be set up in many ways, which makes this subject complex. Financial advice is highly recommended, and the more experienced and qualified financial adviser, the better.
