Trust planning is a strategic estate-planning tool designed to help wealth holders effectively protect and pass on their assets after death. A trust is designed to help provide for future generations in both a tax-efficient way and as a guarantor of greater, longer-term security than a conventional gift.
Trusts exist to facilitate your express legal wishes with regard to future management and distribution of assets. These might include cash, shares, property or other financial investments that could be transferred into a designated trust.
What is a trust?
A trust is defined as a legal agreement whereby bequeathed assets are tightly controlled for the future benefit of their recipients. This might involve transfer at a certain age or relate to a specific set of personal criteria that mean someone is currently unable to manage the assets alone. The eventual transfer of assets will ensure that the legally designated beneficiary has exclusive access.
Key aspects of trust planning
When formulating a trust structure, you will be looking to manage, protect and pass on your assets to beneficiaries within or outside your family. It is most commonly used to preserve wealth, retain control over the timing and method of asset redistribution. It will take into account tax planning, specifically inheritance tax, whilst looking to safeguard assets in the event of probate delays. With all taxes, which also include income tax and capital gains tax, the rates payable will largely depend on how much the beneficiaries are set to benefit by.
There are multiple considerations to factor in when trust planning. Firstly, there are the personnel, with formally assigned roles. In legal terms, the settlor creates the trust, arranges transfers of assets and decides who the beneficiaries are. The trustee is the nominated person or entity, operating individually or as a group, who acts on behalf of the beneficiaries’ best interests, whilst the beneficiaries themselves are the person or group who are due income or capital via the trust.
The most common trust is known as a discretionary trust. In this situation, the settlor gifts all assets to the trust, delegating decision-making to the trustees. In this way, they will determine how the trust fund is invested and how and when trust funds are distributed to beneficiaries.
Key components of trust planning
Then there is the legal terminology which is used to describe every part of the trust process. The deed or instrument document sets out the purpose of the trust and procedures to follow. It is legally binding. The assets, or trust fund, refers to the money, property or investments contained within. The ‘Three Certainties’ of trusts are a legal demand for clear intent, recognisable assets and specified beneficiaries.
The trustees’ ‘powers and duties’ responsibilities involve managing investments prudently, responsibly and impartially. There are also distribution rules which confer on the trustees a specific brief for how and when to distribute designated assets whilst tax considerations involve an assessment of tax status and liability.
The benefits of trusts
There are a number of key benefits associated with trust arrangements. These include ‘Probate Avoidance’, which means swerving the lengthy probate process. They also protect assets from disputes, bankruptcy, creditors and divorce settlements. A trust might also be used to accommodate complex family situations. They offer flexibility and control whereby you set the terms, thus avoiding any mismanagement or ambiguity. They can also be used to factor in a beneficiary’s maturity, vulnerability or special needs.
Trust administration offers a degree of privacy and discretion, avoids disputes and offers continuity for the next generation. The advantages for tax planning are that assets can be removed from a taxable estate, meaning potentially lower rates of inheritance tax. This assumes greater significance if you have assets of value you wish to protect.
It is important to be aware that trusts will involve setup fees as well as time put into administration by trustees. Once active, it is unlikely you would be able to access those assets again. This is why it is important to secure the most suitable legal and financial advice before setting up a trust.
If you are inheritance tax planning in Cheshire or Oswestry and considering a trust, call our specialist team at Hartey Wealth Management today to set up a consultation.
