What are Trusts?
Think of a Trust as a type of virtual safety deposit box, there for you to put assets into for safekeeping, that only you and your nominated Trustees can access.
When your assets are distributed from your Trust to your beneficiaries, this is done on the basis of a loan, so they are receiving a loan from the Trust, rather than a gift.
It is that very subtle difference that has the immensely powerful benefit of removing the value of that asset from your beneficiaries Estate. A loan is an outstanding debt against your estate when you die and must be settled before any Inheritance Tax is paid.
You will need to set up a Trust if you want to:
- Protect your estate against potential future assessment for Care Fees
- Leave assets to a vulnerable or disabled person
- Ensure children from a previous relationship inherit even if you have a new spouse/partner
- Mitigate generational Inheritance Tax liabilities
- Protect a Life Insurance Policy settlement from Inheritance Tax assessment
- Protect your beneficiary’s inheritance from Divorce, Relationship Breakdowns and Bankruptcy
Is it better to have a Will or a Trust?
The answer to this question very much depends on what you want to achieve with your Estate Planning.
If you have a fairly simple Estate and all you want to do is specify who should receive what when you die, make provision for the Guardianship of any children, or express your funeral wishes, then a basic Will is sufficient for your needs.
If, however, you have a more complex Estate that you want to protect from things like Divorces and Relationship Breakdowns within the family, Inheritance Taxation charges, or from being included in any assessment towards future Care Fees, you will want to protect your legacy in a legal and tax-efficient way.
The good news is that this can be done in a safe and highly effective way, using the law as it was intended to be used by HMRC. The solution is Protective Wills which carve the right types of Trusts through them, bespoke to achieving your Estate Planning goals.
You may think the solution is to just name your beneficiaries in your Will and not bother with setting up a Trust. In reality, there are a number of reasons why Will Trusts may be best for your circumstances.
What is the difference between a Will Trust and a Lifetime Trust?
A Will Trust or ‘Testamentary Trust’ is only created upon death. You set up the Trust as part of your Will in order to pass assets on to your family or loved ones and it becomes active on the day you die.
Lifetime Trusts are different from Will Trusts because they are established straight away and not upon death. Lifetime Trusts can be used to make gifts while you are still alive, and depending on the type of Trust used, you can continue to benefit from your assets whilst you are alive, but effectively keep them in the ‘safety deposit box’ of the Trust.
What types of Trust are available in the UK?
There are many different types of Trust, and each is structured to accomplish diverse Estate Planning goals. Before you set up a Trust you should understand what kind of Trust, or indeed Trusts are available to you. The most common Trusts we recommend to Redwood Clients are:
This Trust gives the trustees discretion to decide which of the beneficiaries to pass Trust Assets on to, how much they will receive and when they will receive it. This protects a beneficiary’s money if they are financially unstable for any reason and it means money does not have to pass to a beneficiary who has become wealthy and no longer needs the Inheritance.
A property Trust helps to protect property from being used to pay for long-term care fees. For this kind of Trust to work, you and your partner or spouse must own the family home as tenants in common.
Each partner sets up a Will with each of you leaving your share of the property in the Property Trust. When one of you passes away, that share of the property passes into the Trust. Then if the survivor needs long-term care in the future, only their share is used by the local authority for a means-test when calculating contributory fees, because the other share is protected in the Property Trust. The protected share will eventually pass to the Will beneficiaries. You can also have a Lifetime Property Trust to protect your entire main residence from care fees, if that is important to you.
Life Interest Trust
A Life Interest Trust allows you to specify who will have the rights to your property and assets after you die. It is very similar to a Property Trust in that it offers protection from Care Fees. The main difference is that a Life Interest Trust protects all your assets and not just your property. It also enables you to choose somebody to benefit from the Trust whilst they are alive and at the same time to protect the underlying capital for other beneficiaries after their death.
This is a trust in which the beneficiary is also a charitable trust. Most large charities in this country are ‘Charitable Trusts.’
Setting up a Charitable Trust gives you the satisfaction that your assets will be used constructively and leaves a lasting memorial of your life. Charitable Trusts are free of Inheritance Tax and Capital Gains Tax because they are for the public good.
When should I consider using a Trust?
There are many good reasons for you to consider creating a Trust. Here are our favourite examples:
- You want your spouse to be the Trustee of your Will and your children to be the beneficiaries of your Estate. You own multiple assets and there is likely to be a significant Inheritance Tax issue.
- You are fit and healthy, with no reason to believe that long term care is either likely or on the horizon. However, you want certainty that at some point in the future, should long term care become necessary for you, that your property cannot be considered when assessing your personal liability for your Care Fees.
- You are a business owner, which you share with one or more business partners. You want certainty that, should you encounter issues in the future, there is absolute clarity about your property interests, that they are easy to identify and accessible to you.
- You are getting married and want to ensure your new family and perhaps children, or other family members from a previous marriage, are protected should you die.
- A dispute about a property has arisen has part of a divorce you are going through. A Trust can help prove your interest in the property.
- A late diagnosis for a terminal illness means that you need to quickly put your affairs in order and ensure your loved ones have the best legacy you can leave them and to make sure it stays with them.
- You have teamed up with several other people to jointly purchase a property. In addition to creating and registering names on the land title, you want to clarify further interests for your Estate beneficiaries, as well as ensuring your investment partners understand how these interests work.
- Your job means you are frequently overseas, often for extended periods. You rely on a management company or a trusted family member or friend to take care of your assets and property while you are away. However, ensuring your interests in the property and assets is retained is crucial to you.
Can I create my own Trust and what are the risks if I do?
While the answer to this question is yes you can create your own Trust, we would never recommend that you do!
Trusts are complex legal documents that have multiple pitfalls if they are created in the wrong way. Specificity is the key to a good Estate Plan, which is why we believe that creating an Estate Plan is something that is best left in the hands of professionals like Redwood.
It is rare for us to see a DIY Trust. When we do it is usually because something has gone wrong and a deceased’s beneficiaries are trying to unravel the issues!
We also find that most people don’t have the skills to create their Trust from scratch, resorting instead to purchasing or downloading a cheap, or often free template, to then convert into their own legal document. It is not uncommon to find a disclaimer in the small print of these low-cost products, explicitly advising they are a guide only and recommending the user seeks the services of a legal professional.
True Estate Planning is a skilled profession and letting cost be your driver is likely to lead to your planning being at best, insufficient to deliver your Estate Planning goals and at worst, costing your beneficiaries unnecessary losses or, worse still, being challenged and declared invalid!
That’s not to say that your planning needs to cost the earth either! At Redwood we believe in fixed price working. We dislike hourly rates, commissions or charging by a percentage value of your Estate. We will always give you a complete breakdown of the costs of the work we are recommending BEFORE we even start your planning.
When you compare the cost to implement your Estate Planning against the benefits of protecting it from unnecessary loss, you will find it provides exceptional value for money.
Where can I find out more about Trusts?
We always recommend that our new Clients start by joining one of our FREE 45 minute Wills & Trusts Estate Planning Webinars. This will give you a good insight into what is involved before you even embark on your Wills, Trusts & Estate Planning journey.