Why you can put your confidence in a trust

May 10, 2019
Taryn Lee-Johnston

We all have to face up to the fact that at some point in time we are no longer going to have a place on this earth.  By acknowledging this reality, we put ourselves in a position to take steps to mitigate the impact our death could have on other people, especially those who look to us for financial support.  Here are some tips on how to achieve this, including a basic guide to the use of trusts.

Take steps to minimise your taxable estate prior to your death

The less you leave behind, the less inheritance tax will be levied on your estate.  Obviously, you will need to exercise some common sense about this and ensure that you still have sufficient funds to meet your own worldly needs right up to the point where you no longer have any, but as a rule of thumb if you can pass on a gift to someone while you are still alive (and ideally when you still have a reasonable expectation of living for seven years after making the donation), then from an IHT perspective, it can make great sense to do so.

Leave a will

Making a clear will can go a long way towards easing the practical burden on those left behind.  Remember to keep it up to date if your circumstances (or wishes) change.

Have appropriate life insurance

Even if you believe your assets should be enough to give your loved ones all the support they require, life insurance claims are entirely separate to probate and can be processed much more quickly to give your nearest and dearest helpful financial support at a difficult time.

Write your life insurance into a trust

There are two advantages to writing a life insurance policy into a trust.  The first is that it ring-fences it from your overall estate, thus potentially reducing the IHT bill your heirs will face.  The second is that it can allow you to exercise a degree of control over how the money is used.  This last point means that it may be appropriate to bequeath other assets via a trust even if there is no IHT benefit.  While the forms a trust can, in theory, legally take, are many and varied, in practice, there are three forms of trust which are particularly common for estate planning.

Bare Trusts

As their name suggests, bare trusts really are a “bare bones” form of trust, but then, depending on your situation, you may not need any more.  Bare trusts are held in the name of a trustee but once the beneficiary is of age (18 in England and Wales, 16 in Scotland), they can access the capital and income at any time and use it as they wish.

Discretionary Trusts

The difference between a bare trust and a discretionary trust is that in the latter case, the trustee can be given a far greater degree of authority with regards to how the capital and income are used.  For example, a parent might prefer a discretionary trust to a bare trust to prevent a (very) young adult from going on a spending spree with their inheritance and then having nothing left.

Interest in Possession Trust

With an interest in possession trust, the beneficiary receives the income from the trust but does not take possession of the underlying capital/assets, which will be passed on to someone else in due course.  This type of trust could be used to support children for a certain length of time, for example, until they finish their education, but could also be used to support dependent adults e.g. elderly relatives, without increasing the IHT burden on their estate when they eventually die.

 

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