What is a trust and when should you consider using one?
A trust is a legal arrangement where one person (the settlor) transfers assets to another person(s) (the trustee) to hold on behalf of a third person (the beneficiary). The trustee(s) are responsible for managing the assets and distributing them to the beneficiary in accordance with the settlor's wishes.
There are a number of reasons you may consider using a trust, which includes but is not limited to:
To reduce inheritance tax (IHT): Trusts can be used to reduce the amount of inheritance tax that is payable on your estate. This is because the assets in a trust are not technically owned by the beneficiary, so they are not included in the beneficiary's estate for IHT purposes. It should be noted that IHT is still applied to trusts, but using a different set of rules, which can get very complicated.
To protect assets from creditors: Trusts can be used to protect assets from creditors. This is because the assets in a trust are not technically owned by the beneficiary, so they cannot be seized by creditors. However, this does not apply to secured debts such as mortgages and you cannot usually transfer a property with a mortgage charge into a trust. The mortgage lender has the legal power to block the transfer, unless a special arrangement with the trust is in place.
To provide for loved ones: Trusts can be used to provide for loved ones in a way that meets your specific needs and circumstances. For example, you could use a trust to provide for a child with special needs or to ensure that your assets are passed on to your grandchildren rather than your children.
There is a common misconception that trusts can also be used to avoid probate. Whether any of the estate assets form part of a trust has no bearing on the need for probate. If a will includes a trust which needs to be dealt with as part of the probate process, probate may take longer. The need for probate depends on the assets in the estate, not whether there is a trust.
Generally, most people do not need to use a trust. If you’re married or in a civil partnership and own your main residence, you will likely be exempt from paying IHT on the first £1 million of your estate. Protecting assets from creditors is only likely to apply if you pass away having amassed significant unsecured debts. However, trusts to protect the interests of children, particularly those with special needs, can be a very useful and tax efficient instrument to manage your assets.
If you are considering using a trust, it is important to speak to a solicitor or financial advisor to get advice on the best type of trust for your needs. They can help you to understand the different options available to you and to make sure that you set up the trust correctly. It is also important to weigh the potential benefits against the fees associated with setting-up and maintaining a trust, we recommend asking for a full breakdown of expected fees and taxes paid over the lifetime of the trust.
