Trust Help Protect Your Family Assets

Preserve your wealth. Trust your heirs.

It may not be a fortune, but it's yours. And after you’re gone you still want to keep the taxman from claiming too much of it.

A trust is created when an individual (you) transfers assets to a trustee (a family member or professional), who then administers these assets on behalf of beneficiaries (usually your heirs). Assets can include investments, shares of private companies, principal residences, holiday homes and family heirlooms. Beneficiaries can also include a company, a charity or even unborn grandchildren.

I do however think that it is crucial that the wealth creator takes control of their plan for the future and communicates their wishes and the reasons for their decisions. The wealth creator will have significant credibility among the family and time taken to explain what their plans are is likely to lead to a smoother and more successful transition of wealth.

The spectre of inheritance tax in the UK (IHT) is often the spur to move wealth-holders into action. IHT is charged at 40% of the value of a person’s chargeable estate (broadly any wealth over ￡325,000). There are some reliefs for business or agricultural property but for those individuals who have significant amounts of cash, liquid investments or commercial (or residential) property, the potential IHT arising on their death can be sizeable. IHT is also payable within 6 months of the death, which leaves little time to realise the funds if some assets are illiquid.

In the UK, it is possible to make unlimited gifts to other individuals and no IHT will be payable provided the donor survives the gift by 7 years. Life insurance could be taken to cover any liability which might arise within this 7 year period, but this will require medical underwriting which can be harder to secure as people get older. There may be some capital gains tax (CGT) payable if you gift assets and the implications of CGT should be fully understood before any action is taken.

Wealth creators often worry about the impact of giving significant sums to their children, particularly if their children are married. This can lead to the use of discretionary trusts where the wealth is gifted into a trust controlled by the wealth creator but for the benefit of a wide class of beneficiaries, largely family members.

In preparing a long-term plan for the family wealth, there is often no right answer on what needs to be done. The details of any plan will depend upon the attitude of the wealth holder / creator and the specific circumstances of the family.

There are however a number of ground rules which may be helpful to consider:

Here is an outline of one scenario that could involve trust and help to reduce tax on the settlor;

Two grandparents with surplus capital might want to pass it on by helping a 2-year-old grandchild with their university education in 16 years’ time

A possible solution could be a bare trust, the key features of which are. The grandparents could transfer assets into a bare trust.

The amount settled into a trust may fall outside of the grandparents’ estate for IHT purposes, reducing the tax bill on their death

Any income or capital gains arising from the trust assets are taxed at the child’s marginal tax rates once that child’s tax allowances have been used up

The grandchild will become entitled to the funds within the trust aged 18

Capital can be advanced earlier by the trustees for specified purposes such as to cover healthcare costs or maintenance

Setting up trusts properly requires a couple of key decisions, who will benefit and when? The right trust structure needs to be chosen and the trust deed then executed properly

Who will act as trustee? It is important to appoint people who understand the responsibilities that come with the position and are of an appropriate age – a professional may be used as sole, or joint, trustee

Once the trust is established it should be regularly reviewed to ensure that the original trust deed (e.g. where included in a will) is still appropriate.

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