Trusts

Putting it in trust

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There is a trust where one party has legal ownership of an asset but holds it for the benefit of someone else.  The person who puts the asset in the trust is the settlor. The parties who control the assets are the trustees. Those that get the benefit of the asset are the beneficiaries. There are a number of ways you can create trusts but one of the commonest is when the settlor sets up a trust through their will.

Some reasons why might you want a trust

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You would usually use a a discretionary trust to

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  • give someone the benefit of an asset only during their life time and then leave it to someone else.
  • leave an asset to someone who is under 18
  • leave assets to someone when you don’t want them to have the asset until a specified age over 18.
  • give assets to a person who hasn’t got the mental capacity to look after their affairs
  • avoid someone being deemed to own an assets but still be able to benefit from them
  • reduce a tax bill

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Inheritance Tax Saving

Inheritance tax is a tax on the value of the estate of a deceased person. In working out that value certain allowances can apply, just like personal allowances and income tax. Everybody has a “nil rate” inheritance tax allowance, it’s currently £325,000. In addition anything a person leaves to their married partner or civil partner is free of tax.

Currently tax is payable at 40% on assets over £325,000 (plus £100,000 residence allowance where applicable) which are not left to a spouse or civil partner.

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Married or civil partnership couples

Up until 2007 if someone died and left their spouse all their assets there was no tax to pay on that first death. However their “nil rate allowance” was wasted. When the second spouse died they would only have their own “nil-rate” allowance to use on the value of their estate. This included what they had inherited from their deceased spouse. Therefore the tax payable on the second death was likely to be higher. The first spouse to die could have given away assets during their life time to someone else to use up their tax allowance. However their spouse may need all that money or to live in the house they shared .

To avoid the loss of the use of the nil rate band the first spouse created a discretionary trust under their will. Some of their assets were paid into the trust. By using their nil rate allowance tax wasn’t payable. The surviving spouse could be a beneficiary under the discretionary the trust so potentially was not deprived of the money if they need it. However whatever they don’t use remains in the trust and doesn’t belong to them so when they die it isn’t subject to inheritance tax.

The rules changed in 2007. Any surviving spouse or civil partner who dies after that date can use their spouse or civil partner’s nil rate band as well as their own.  This will also apply to the new residence nil rate band. These rules mean there is less need to keep money out of the second spouse’s estate.

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Other couples

However discretionary trusts are not yet dead. Many people are not married or in a civil partnership so they can’t benefit from the right to transfer assets between spouses. So if a partner leaves all their assets to the other partner it counts against their nil rate allowance. Even if the whole nil rate allowance or residence nil rate band isn’t used by the first partner, when the second partner dies they only have their own allowances.

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Substantial Estates

Even if you are a married or in a civil partnership your estate may still be more than the inheritance tax allowances. This may be so even taking account of the new residence nil rate band. Remember when you die any outstanding mortgage is usually paid off by an insurance policy. Bearing in mind the value of property particularly in the South East many people may find their estate is bigger than their allowance.  For example adding all your assets to your spouse’s might take the value of the joint estate to £950,000. If that happens it creates a “gift” of £80,000 to the exchequer on the second death. It might be possible to mitigate this with the use of trusts.

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Under age children

Where children are beneficiaries they can’t give a receipt for money under the age of 18. In many cases parents wouldn’t want to make outright gifts to their children until they are even older. However setting ages for inheritance above 18 might create IHT consequences.

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Long term care

Quite often an elderly person envisages giving away assets to reduce their estate. Their concern is that if they need nursing home care they will not be be entitled to state provided benefits because of the value of their assets. However if they still need the asset e.g. to live in their home until they go into care, then giving it away to their children is unlikely to help.

Similarly if a disabled dependent were to inherit an asset such inheritance may affect their entitlement to benefits. Creating discretionary trusts where they are one of the beneficiaries may help provide them with extras withot being taken into account by the benefit authorities.

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Trusts useful not simple

This is a very brief summary of some of the ways trusts can be used. However they are not as simple to set up or run as some people think. Trusts need proper administering and there may still be tax to pay. It’s worth calling us for advice about the advantages and disadvantages involved in setting up a trust.

 

Kevin Moon– Private Client Solicitor -Partner

 

 

01233 714055


Wills    |    LPA    |     Tax     |     Probate