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The Basic Principles Of Trusts

More common than you think ...



People assume that trusts are only used by the wealthy, however, they are more common than you think. A trust is created when assets are held by a person (or a group of people) for the benefit of others ...

Trusts play a useful role in estate planning since family relationships can become complex!

Trusts play a useful role in estate planning since family relationships can become complex!

copyright: fotohenk / 123rf stock photo

Life insurance policies and pensions are typically 'written into trust' and so held outside of an estate for Inheritance Tax purposes. This is because the policy administrator has discretion over who gets the value.

"Yes, they would be guided by any letter of wishes but they still have discretion!"

The most common trust that people will need to make decisions about are those that provide for family finances. Some common situations are:

  • To provide for a spouse after death while protecting the assets for future generations. This is particularly relevant for estate planning where remarriage is a concern.

  • To aid succession planning for family businesses.

  • Providing for children/grandchildren until they are able to manage their own affairs.

  • Providing for vulnerable beneficiaries who aren't capable of managing their own affairs.

As can be seen, trusts play a useful role in estate planning especially since family relationships can become more complex with divorces and second marriages.

One of the most confusing things about trusts is the range of names given to different trusts. However cutting through all these names, there are two factors that will determine the type of trust:

  • What rights do the beneficiary have to income or capital?

  • Can the trustees accumulate income or must they pay it out to a beneficiary?

At one end of the scale, a beneficiary will have an absolute right to both the income and the capital. Beneficiaries over the age of 18 can demand the property be given to them, and the beneficiary's right to the property can't be taken away. Such a trust is called a Bare or Absolute Trust.

At the other end of that same scale, beneficiaries may have no rights to receive income or capital as this is solely at the discretion of the trustees who are allowed to accumulate income rather than pay it out. This type of trust is called a Discretionary Trust.

There is a third option, in which a beneficiary has a right to receive income from the trust but not necessarily the capital. Who is entitled to the capital and when this happens will be set out in the trust wording. Even if the beneficiary has rights to the capital, this will not be absolute and can either be at a set date and/or could be at the discretion of the trustees. This is called an Interest in Possession Trust (IIP).

"Trusts are often perceived as being devices used to avoid tax!"

However, that is often not the case, and in fact, the tax burden on trusts can make them expensive. The reality is that most people use trusts purely as a means for preserving family wealth and, when considering whether to put assets into trust, tax is often a secondary consideration.

Please remember, you should always take professional advice when looking at trusts and your inheritance tax position as a blog post can only give you a general outline of how it works.

"Would you like to know more?"

Do give me a call at Essendon Tax Consultancy on 01908 774323 or click here to send me an email and let's start a conversation around trusts and see how I can help you.

Until next time ...


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More about Helen Beaumont ...

Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.