Trusts are an extremely useful financial planning tool. A trust fund is a legal entity that is frequently used by the rich, but many ordinary households are unaware of how they can help with estate planning to protect assets and mitigate tax. Here are 10 things you need to know about trusts.
1. Trusts are not just for the super wealthy
Wealthy families have long known the tax benefits of trusts which enable them to pass their enormous fortunes from generation to generation without paying onerous death duties. Family members are trustees of an estate, rather than direct owners, and this protects their assets. This may seem unfair, but anyone can take advantage of trusts as an estate planning tool to protect their wealth and minimise their inheritance tax (IHT) liability so that more money is passed to their loved ones after their death and less to the taxman.
2. Trusts can help you reduce your IHT liability
In the UK, IHT is charged at 40% on all worldwide assets above certain allowances such as the Nil Rate Band (NRB)of £325,000 and the Main Residence Nil Rate Band (MRNRB) of £175,000 (where applicable). For individuals who have assets worth over these amounts, trusts can be used to reduce a potential IHT bill.
3. Trusts are a legal estate planning tool
There is nothing untoward about using trusts in this way. If set up correctly, they are an entirely legal way of passing wealth on to future generations of your family and giving them a head start in achieving financial security. Trusts are a great way of managing assets and protecting assets for future beneficiaries.
4. Trusts are not subject to probate
When a person dies, their assets are frozen until probate is granted. This is frequently a lengthy process which can cause families to suffer financially if they are denied access to necessary funds to survive. They can also face the problem of how to pay inheritance tax owing without access to assets.
Assets held in trust, on the other hand, are ringfenced outside the deceased’s estate and can be accessed very quickly in the event of a death. The trustees are able to distribute funds immediately without waiting for probate to be completed.
5. Trusts can control how and when loved ones receive an inheritance
Trusts are often used for gifting assets to loved ones while still retaining some control over trust assets. The person setting up the trust can dictate how assets within the trust are invested. This can be useful in many different scenarios. Frequently, parents use trusts to prevent children from accessing inheritance money at a young age when they may not use it wisely. Trusts can also be used to provide for a disabled child who is unable to manage their own finances or to protect the assets of children from previous marriages for those who divorce and remarry.
6. Trusts are a key tool for UK expats in mixed marriages
While assets can be passed between UK domiciled spouses free of IHT, this is not the case if you are UK domiciled and your partner is not. Non-domiciled spouses will benefit from the £325,000 Nil Rate Band and a spousal transfer of £325,000, but any assets above the £650,000 offered by those two exemptions are taxable at 40%. This is why many expatriates living in Asia set up trusts.
7. There is no minimum amount required to set up a trust
While there will be fees involved in setting up a trust, they are minimal. Trusts can be set up with relatively little capital, but you do need to make sure that the reasons why you are opting for a trust are sound. Take professional advice on this because….
8. Trusts are complicated to set up
HMRC have cracked down hard on tax avoidance in recent years, so you really need to ensure that you consult a qualified professional when setting up a trust to ensure that you are compliant with all the necessary regulations. You also need to be aware of the implications involved. In most cases, you must live for at least seven years after setting up a trust in order for it to be entirely exempt from IHT.
9. Assets in trust no longer belong to you
You should be aware that, effectively, the assets put into trust no longer officially belong to you. They belong to the trust and are managed by the trustees. With some types of trust, you can be a trustee of your own trust, but this can get complicated. Again, seek the advice of a professional.
10. There are many different types of trust
From discounted gift trusts to excluded property trusts, there is a wide range of trusts to choose from with different costs, obligations and functions associated with each one. This is another reason why it is essential to seek professional guidance to make sure you choose the right one.
Here at Infinity, we have a wealth of industry experience helping expatriates in Asia to use trusts as an estate planning tool to protect their assets and receive valuable tax advice. If you have any questions about trusts or you would like to explore whether a trust is suited to your circumstances, please get in touch.
Retain Ownership With A Revocable Trust
Certain trusts are structured so that the grantor designates themself as the trustee and thereby retains control and ownership of their trust assets. Grantors generally set up a trust in this way because of the many benefits it presents regarding the time, cost, and publicity often associated with estate probate.
Additionally, grantors frequently create a revocable trust by setting a limit on the term the trust stays applicable or otherwise retaining their rights until the legal arrangement ends. Although there are many benefits associated with grantor trusts, there are no tax savings involved.
If a grantor can revoke a trust, they remain liable for any trust income taxes, and the assets are available to the creditors. Corporate clients often create grantor trusts to separate assets to serve as an assurance for future liabilities for the sake of retirement planning benefits for employees.
A trust is irrevocable when a grantor transfers the control and ownership of assets owned by the trust permanently to a trust agreement. A third-party trustee is then the rightful owner of the trust assets and is also responsible for the income taxes and the disposition of all assets. The grantor’s creditors can no longer claim the trust assets.
Irrevocable trusts are generally used as college funds as well as financial provision for children and other future generations and provide the grantor with an estate plan and tax benefits.
Trusts For Children and Estate Planning
There are many different types of trusts that serve different purposes, but parents and their parents often use trusts to plan for the financial security of their offspring while simultaneously facilitating their own estate plan and taxes.
If the total value of parents’ estates exceeds or is expected to exceed the tax threshold, they reduce the number of assets in their estate. Parents can transfer the ownership of a trust with gift tax exemptions of up to the allowed limit annually without the inclusion of gift tax. If the gift amount is higher than the limit, it becomes taxable when the excess gifts are greater than the estate tax threshold.
Wealthy families often use trusts to limit the total value of their estates and decrease the tax on their taxable income. The substantial tax rate that would have been applicable to their income is then reduced to the rate that is imposed on their offspring’s income. If the transferred assets then appreciate, the beneficiaries are ultimately the owners of the increased amount.
For instance, if an investor buys shares of a business and immediately transfers those shares into a trust for a child, the trust would presumably increase in value substantially and pay capital gains tax on the gains of the shares. However, if the stocks are distributed to the beneficiary, there is no tax payable on the transfer, and the beneficiary would be responsible for the tax that will be due when the stocks are sold.
Additionally, suppose assets that are paying interest or dividends are placed in an irrevocable trust. In that case, the grantor will not be liable for income tax, but the trust has to pay tax on the annual income for the relevant year.
- Individual and corporate clients create trusts for many purposes, such as charitable, to conduct business, and for personal life goals, like providing financial security for their families and other beneficiaries.
- Trustors of irrevocable trusts don’t have rights and control over the trust, the trust assets, or the trust income, and the trust property is not included in their estates.
- Keeping money in trusts benefits the grantor in terms of probate and taxes.
Chartered Financial Planner
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