Trusts have long been used as a way to manage wealth, protect assets, and support long-term financial planning.
While they are sometimes viewed as complex structures, they can provide significant benefits when used appropriately and supported by professional advice.
In this article, we explain what a trust is, how it works, and some of the advantages and considerations involved in setting one up.
What Is a Trust?
A trust is a legal arrangement in which assets are held and managed by one party on behalf of another.
Assets placed into a trust can include cash, property, investments, or other valuable items.
The rules governing how those assets are managed and distributed are set out in a trust deed, typically prepared by a solicitor.
Three key parties are involved in a trust arrangement:
- The settlor – the individual who places assets into the trust.
- The trustees – the people responsible for managing the trust and its assets.
- The beneficiaries – the individuals who benefit from the trust assets, either through income or eventual ownership.
Different types of trusts exist, each with its own rules and tax treatment, so the most suitable option will depend on the objectives of the person establishing the trust.
Why Are Trusts Used?
Trusts are flexible arrangements and can be used for a variety of financial and family planning purposes.
Maintaining Control of Assets
In some situations, individuals may wish to transfer wealth to family members while retaining a level of oversight over how those assets are managed.
For example, a trust can allow parents or grandparents to pass assets to younger family members while trustees manage those assets until the beneficiaries are ready to take control.
Protecting Vulnerable Individuals
Trusts can also help manage assets on behalf of individuals who may not be able to manage their finances themselves, such as those with certain illnesses or disabilities.
In some cases, compensation payments or financial support can be placed into trust so that funds are managed responsibly and beneficiaries continue to receive appropriate financial support.
Protecting Family Wealth
Trusts can play a role in protecting family wealth across generations.
Assets held in trust may be less vulnerable to certain personal circumstances affecting beneficiaries, such as divorce or financial difficulties.
Some trust arrangements can also allow one individual to benefit from an asset during their lifetime, while ensuring it ultimately passes to another person at a later stage.
Inheritance Tax Planning
Trusts can also form part of wider estate planning strategies.
Certain trusts have their own inheritance tax thresholds, meaning assets transferred into a trust (within allowable limits) may reduce the value of an individual’s estate for inheritance tax purposes.
However, the rules surrounding inheritance tax and trusts can be complex and require careful planning.
Managing Income Efficiently
In some circumstances, trusts can also allow income to be distributed among beneficiaries in a tax-efficient way, particularly where beneficiaries have unused tax allowances.
However, the tax treatment depends on the type of trust and the beneficiaries involved.
Potential Downsides of Trusts
While trusts can be beneficial in the right circumstances, they are not without cost or complexity.
Setup and Ongoing Costs
Establishing a trust typically requires legal advice and documentation, which involves professional fees.
In addition, trustees may need to register the trust with HMRC and complete tax returns where applicable.
Gifts With Reservation of Benefit
If an individual places an asset into a trust but continues to benefit from it for example, transferring a property into trust but continuing to live there — the asset may still be treated as part of their estate for inheritance tax purposes.
Periodic Tax Charges
Certain trusts may also be subject to inheritance tax charges at regular intervals, often every ten years.
These charges depend on the value of the trust assets and the type of trust in place.
Considering Whether a Trust Is Right for You
Trusts can be a powerful planning tool for managing assets, protecting wealth, and supporting long-term financial objectives.
However, they must be structured carefully to ensure they achieve the intended outcome.
Because each trust arrangement is unique, it is important to seek professional tax and legal advice before setting one up.
This can help ensure the structure is appropriate for your circumstances and compliant with current regulations.
Getting in touch
If you are considering setting up a trust, it is important to ensure the structure aligns with your long-term objectives and personal circumstances.
We can help you explore your options, assess how a trust may be used effectively, and ensure everything is structured appropriately from both a tax and practical perspective.
To discuss your situation, call us on 01634 731390 or book a discovery call.
