Allowing your wealth to pass outright to a beneficiary, whether that person is a spouse, partner, a child or other relative, means that you lose control over how your estate is used. Outright gifts place the asset in the estate of the beneficiary and the value of the gift may be subjected to one of a number of threats:
- Children or grandchildren without responsibility who may squander the money.
- Second marriage that may dilute your estate down a new line of family you have no knowledge of.
- A beneficiary that has poor financial management and may be exposed to bankruptcy.
- The cost of providing nursing or residential care.
- Influence from others who may not have been provided for in your Will.
- Inheritance tax in the family generally.
- There is a way to prevent or mitigate these threats.
The Trust
The type of trust is known as a discretionary trust and has the advantage of including all the people you may want to benefit but the final decision to distribute funds is taken by the trustees you have chosen. They are in the privileged position of being able to witness the circumstances of the beneficiaries that are not at the moment foreseeable.
Inheritance Tax
You can generally gift up to the value of the inheritance tax threshold (currently £325,000) into trust without inheritance tax arising. However it is important to look at not just your own immediate inheritance tax position. Thinking of the wealth of the beneficiaries is important to determine whether a trust is a good vehicle to pass your estate into. Using this will avoid your estate adding to another estate that may already be in the inheritance tax trap.
The Trustees
The Trustees are the people appointed to manage the investment and distribution of the Trust. It is very important that you appoint the right people to act for you. An independent Trustee (such as a Solicitor) may be appointed to ensure that that the Trust is managed in accordance with your wishes. NewLaw offers a professional Trustee service. (see our Professional Trustee Service Guide)
Letter of Wishes
This is your personalised letter that you leave addressed to the trustees containing your guidance about who you would like to benefit, by how much and when. They are not legally bound to follow the letter but it is influential and an important element to make it known why you have included a trust.
The family home and funding the trust
It is common just to fund the trust with the inheritance tax threshold of £325,000 particularly when planning Wills for spouses or civil partners. Alternatively it may be appropriate to leave all of your estate into a trust to protect the value from unforeseen events but this depends on your circumstances.
For many people the main value of their estate is represented by their home. It is therefore common practice to make use of a share (often a half share) in the home to fund the trust on the first death. Joint property ownership (see our Joint Ownership of Assets guide) can usually be easily managed to allow this arrangement. The trustees of your Will are given the option of owning a share of the property jointly with the survivor or they are given the power to transfer the share of the property subject to a debt in favour of the trust. There is therefore significant flexibility with this and a decision can be taken at the time of death.
Don’t let the taxman take your money, call us today
01224 848388
This email address is being protected from spambots. You need JavaScript enabled to view it.
