This blog post is the first in a series of five, based on the webinar, explaining everything you need to know about trusts.
What is a trust?
A trust is simply a ‘vehicle’ or wrapper that holds and owns assets on behalf of a beneficiary.
A trust involves three different parties:
- The settlor provides the funds for the trust. They transfer assets from themselves to the trust.
- The trustees are appointed by the settlor to look after the assets within the trust. As the name suggests, the settlor should trust them! Trustees can be individuals or a professional trust company. They are the legal owners of the trust property and have duties that they must carry out, namely, to ensure that the settlor’s wishes are adhered to and that the assets within the trust are managed correctly.
- The beneficiaries are the beneficial owners of the trust property.
- With an absolute trust (also called a bare trust), the beneficiaries are named and have an outright entitlement to the assets in the trust. E.g. David sets up a trust and names his two children, Peter and Ellie, as absolute beneficiaries who each own 50% of the assets in the trust. When they are of age, they are entitled to demand their share.
- With a discretionary trust, the settlor writes a letter of wishes to the trustees to designate the ultimate beneficiaries, and the trustees carry out these wishes but have the discretion to change, add or remove beneficiaries. No beneficiary can demand an asset – it is up to the discretion of the trustees. E.g. Eva designates her children and grandchildren as discretionary beneficiaries without naming them specifically, thereby including any who are not yet born.
Why Use an Infinity Cash Trust?
These are the four most common reasons for keeping money in a trust:
To avoid probate on death
A trust ensures quick access to capital for beneficiaries in the event of a death. When a person dies, the assets within their estate are frozen until probate is granted. This can be a lengthy and stressful process. Assets which are held in trust remain outside the estate enabling the trustees to distribute them immediately as they see fit so that the beneficiaries can access money without waiting for the probate process to be carried out.
To control family assets
A trust can be a tool for individuals to gift assets while still retaining some control over them. A settlor can also be a trustee in order to have a say in how assets within the trust are invested.
Inheritance tax planning for UK domiciled individuals
Trusts can be used to reduce a potential inheritance tax (IHT) liability. UK domiciled individuals pay 40% on all worldwide assets over the Nil Rate Band of £325,000. This is explained more fully in part two of this blog series.
Inheritance tax planning for non-UK domiciled individuals with assets in the UK
Non-UK domiciled individuals pay IHT at the same rate on their UK-based assets. Again, this is more fully explained in the next blog post in the series.
Many expats in Asia put their funds in a trust for their inheritance tax planning. To appreciate their value, it is vitally important to understand the frequently misunderstood concept of domicile. In the next post in this series, we explain the three different types of domiciles and the ten most important things expats need to know about inheritance tax in the UK.
Disclaimer: Please note that this post is intended for informational purposes only. Trusts and inheritance tax planning are complex subjects with no one-size-fits-all solution. You should always seek expert advice from a qualified professional before making important financial decisions.
Advantages of Having a Trust with our Company
- The growth of the value of assets is pegged on your trust instead of your established personal estate.
- An estate is helpful in instances where assets such as farming businesses, which cannot be divided, have to be kept for the advantage of more than one beneficiary.
- A trustee can preserve funds to be passed on to successive generations for any purpose, such as contractual agreements or education.
- A trust with our company can be used to provide maintenance for children in the case of a divorce.
- A trust can be used as a precaution to support and protect surviving spouses regarding their financial interest, investments and trade activities.
- Saving on transfer costs and executor’s fees.
- Trusts prevent potential future inconveniences, such as a forced sale of your business or other assets.
- Depending on the circumstance, trusts can potentially help you save on income and capital gains tax.
- A professional trustee, like our company, can be expected to remain unbias toward beneficiaries and provide fair and quick access to funds after an unfortunate event.
- Our company helps you be prepared for the future by taking the vision you wish to achieve into account and ensuring proper management of your funds over indefinite periods.
Chartered Financial Planner
I am an active member of the CII and the Personal Finance Society (PFS) and believe strongly in their code of ethics and only doing the right thing for my clients.