What can a Trust do? - Crombie Wilkinson Solicitors

What can a Trust do for me?

Good estate planning involves taking steps to ensure your estate is inherited by the people of your choice, in the manner and at the time you wish. Above all, it is about control; the desire to avoid certain outcomes whilst promoting others. A secondary factor is tax. If you make a gift and live seven years afterwards, its value is not added back to your estate on death, which gives a positive result for inheritance tax (IHT).

In the UK, trusts have been used for many generations as a tool to deliver these benefits. There are no official figures on the number of trusts which exist, but looking just at one type of trust (the discretionary trust), there were 116,000 such trusts that filed tax returns in 2006/7 *. This is only the tip of the iceberg, however, as many trusts are not required to file tax returns and other types of trust are not included in that figure.

Trusts can be created in your lifetime as well as being written into a Will. The trustees own property which is held for the benefit of others, in line with the particular terms of the trust deed. A typical scenario involves grandparents who wish to set aside funds for their grandchildren. One option is a direct gift to those grandchildren, in which case there is no control over when or how the funds are accessed, since at age 18 the funds belong to the grandchild. The second option involves gifting those funds to a trust. Assuming the amount involved does not exceed the current nil rate band for the tax year and the grandparent has not made other historic gifts, no immediate IHT bill arises.

The advantage is that the trustees control when funds are made available. It may not be wise to pay out the full share to the grandchild at the time they are at university: the age at which a person develops the ability to handle finances sensibly is rather variable! Funds can be paid gradually over many years and could be held for the next generation not yet born.

There is also a protection angle here. That grandchild might have special needs. Or placing a large amount of wealth in their hands may make them vulnerable to attracting the wrong sort of company, or enable them to fund a lifestyle which could ultimately harm them. Many families have had experience of dealing with someone who has an addiction of some kind. The benefits here of using a trust are more obvious. The trustees can purchase items required by the beneficiary rather than pay out funds directly, which balances the desire to support the individual whilst not distributing cash which would inevitably be used for something else.

Trusts can also be used with life policies to ensure the proceeds are paid out more speedily in the event of death, as well as those payments falling outside the estate of the individual for IHT in many cases.

Those in partnerships and owner-managed businesses may also find that their succession planning strategy could benefit from a trust being used with life policies.

Finally, trusts are a way of dealing with the unknown in terms of the destination of assets under a Will. A discretionary trust in a Will allows your trusted trustees to make decisions in light of the prevailing circumstances many years into the future. This flexibility is an attractive feature of a
trust. Weighed against all these benefits, there are professional fees involved in creating and running the trust and its investments, but for many families who want to secure these benefits to protect their wealth, it is a price well worth paying.

Please do not hesitate to contact a member of our Private Client team if you would like to discuss Trusts.