A vital part of estate planning, the most practical and tax-efficient way to control the financial assets you want to leave to your family and loved ones is to arrange a trust on their behalf. You can transfer assets into a specific trust, which is then handled by a trustee for the benefit of your beneficiaries, and can be seen as outside your main estate (depending on the time frame).
A trust can be essential in protecting portions of your estate in cases of divorce, bankruptcy, inheritance, a partner’s marriage after your death, and long-term care costs. It can enable you to specify who will benefit from the trust, and perhaps more importantly, who may not. Trusts can also be set up to arrange care for children, make plans for incapacity and provide protection for property without going through probate. Our Wills and trusts service is managed by our sister company, Carlton Smith Asset Protection, who will be happy to walk you through what needs to be done.
How many types of trust are there?
There are several types of trust in the UK, and all of them involve a trustee (trust administrator), a settlor (person who puts assets into a trust) and a beneficiary:
- Bare trusts – typically used to pass assets to young people, who can make use of them when they come of age.
- Interest in possession trusts – where a beneficiary has the right to income generated by the trust, but not the assets.
- Discretionary trusts – used to benefit people unable to deal with the money themselves, where the trustee decides how and when the capital is used.
- Accumulation trusts – where trustees can accumulate income within the trust, or pay it out as per discretionary trusts. Mixed trusts – a combination of more than one type of trust, where each part is treated according to the tax rules that apply to it.
- Settlor-interested trusts – where the settlor or their husband, wife or civil partner benefits from the trust. Basically, a trust for yourself.
- Non-resident trusts – where the trustees are not resident in the UK for tax purposes. The rules for these trusts are very complicated.
How can a trust protect home ownership when a spouse dies?
It is totally natural to assume that the best way for you and your spouse or civil partner to own your home is through joint ownership. However, when one of you dies and the whole ownership of the property passes to the other, this may leave your inheritance exposed to the costs of long-term care or open to re-allocation should your spouse remarry.
It is not widely known, but it may be wiser to own your home as ‘Tenants In Common’, so that your half of the property value can be placed in a trust upon your death. By doing this, your spouse only owns their share of the property and you are able to pass your share on to your children or another beneficiary. As your spouse will not own all of the home, it will help to be protected from demands on it for means testing and changes of ownership.
Can a trust ensure my legacy stays within my bloodline?
A trust is actually the most efficient way to ensure your assets cannot be diverted outside of your immediate family, and we most commonly find this strategy used to mitigate cases of marriage after death or the potential divorce of your children.
For example, you may unfortunately die before you reach a ripe old age, leaving your spouse alone. In the typical course of things, if you have arranged so in a Will, they inherit the entirety of your estate. A few years later, perhaps your spouse meets someone else who is kind to them and they fall in love and get married. Now, the new partner has joint ownership of what was once your estate. And if he or she has children, then they could be set to also inherit a sizeable portion of your assets upon their death, rather than your own children. If you would rather prefer your own children to inherit your assets, then you can place them in trust to achieve this.
How does putting assets into a trust reduce tax exposure?
Very simply, by putting your assets into a trust, you are placing them outside of your estate. The assets of a trust are run by the trustee for the benefit of named beneficiaries, which could be individuals, a charity, an organisation or even yourself – it depends on the type of trust. In effect, they are no longer your assets, and in this way you can start to reduce your overall tax burden. You may even be able to have a tax free income from a trust.
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Do you own a business?Have you spent your working life investing yourself in your business? Maintaining that level of attention and dedication to your clients, your services and your employees may mean you are on top of your operation’s finances, but perhaps not fully aware of your personal situation. We can help you to grow your money and plan for the future with your pension.
Are you retired, or approaching retirement?Concerns about your cash flow may be at the forefront of your mind as you consider your retirement. Will you have enough, or have you run out of time to accumulate the necessary funds? We can assess your financial position and work with you to make the most of your pension pots so you are able to maintain your chosen lifestyle.
Do you have a final salary pension?You may have paid into company pension schemes for years, maybe decades. But what will those funds mean to you when you retire? What might seem a reasonable amount now might not look the same in future with the rising cost of living. You need help to fully understand your pension pots to solve immediate needs and set up a private pension to keep you secure in retirement.
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