Trusts
The introduction of the Trustee Act 2000 marked a change in an area of law which had remained largely unchanged for 75 years.
So what?
You may ask how trust law affects you or how it has any relevance to your life.
Most people are trustees even if they do not know it.
If you own a house with another and the house is in your joint names, you are a trustee of land!
But trusts have a variety of uses which include:
- Providing for the vulnerable.
- Passing assets to children in a tax efficient way.
- Safeguarding an inheritance.
- Saving Inheritance Tax.
But a trustee has legal responsibilities and the job should not be undertaken lightly.
There are several types of trust. The main ones are:-
Immediate Post Death Interest Trusts (IPDI)
People are frequently faced with the dilemma of providing for a spouse or a partner during that spouse's or partner's lifetime but wanting to ensure that what they leave on death will eventually be inherited by their children.
Such a trust gives the spouse or a partner a right to income from the capital but not the capital itself. The capital is eventually passed on to the children following the death of the spouse or partner.
It is possible to incorporate within an IPDI Trust an element of discretion. The trustees have the discretion but not an obligation, to use part of the capital for the benefit of the spouse of partner if the trustees so decide.
As the spouse or partner merely has the right to the income from the capital, the capital is protected and is not available as such for the payment of residential or nursing home fees of the surviving spouse or partner.
Such a trust however does have inheritance tax consequences depending upon the size of the trust and the value of the assets of the surviving spouse or partner on his or her death.
Age 18 to 25 Trusts
Where funds are held in Trust for beneficiaries and they inherit between the ages of 18 and 25 years of age there is a potential tax charge of 4.2% (at most) of the trust capital. No such charge arises if the beneficiaries inherit at age 18 but many people believe it is a price worth paying to safeguard the underlying trust assets until the beneficiaries are a little older.
Trusts for the Vulnerable
If a person has a physical or mental disability or where the distribution of Trust funds are to be dealt with in a flexible manner this usually takes the form of a Discretionary Trust.
The trustees invest the trust capital and have a discretion to use it and the income from it as they see fit for the benefit of the beneficiary.
Such a Trust enables investment decisions to be made by the trustees and any beneficiary’s entitlement to state benefits are unaffected enabling the trustees to use the trust funds to provide for extras rather than paying for the cost of care.
PASSING ASSETS TO CHILDREN IN A TAX EFFICIENT WAY
Probably more trusts are set up each year to benefit children than for any other reason.
But there is one basic rule you must observe.
Make sure you can afford to put assets into trust because once you have done so, you cannot get them back.
Such a trust is often used by grandparents to build up a fund to provide for the education of grandchildren, frequently using any surplus income which they may have.
But if you die within seven years of creating the trust, your estate may have an inheritance tax bill to pay.
However if you survive that period, and the trust complies with the relevant legal requirements, there can be worthwhile income tax and inheritance tax advantages.
SAVING INHERITANCE TAX
If you are married, it is tax efficient to leave something to your children on the death of the first to die.
You can leave up to £300,000 (in the tax year 2007/08) to your children free of tax on the first death. If you leave all your assets to your children on the death of the survivor, these assets may be taxed.
This allowance is called the nil rate band.
The rate of inheritance tax is 40%.
Setting up a Discretionary Trust of the nil rate band in your Will can be tax efficient yet at the same time practical.
No one knows what the future holds and leaving substantial assets to your children on the death of the first to die, can leave the surviving spouse vulnerable. Having set up a Discretionary Trust of the nil rate band, on your death the trustees can decide at that time (depending on circumstances), how much should go to the children and how much the surviving spouse needs, and yet still ensure tax efficiency.
Often the capital is distributed to the children or the spouse or a combination, as the case may be, shortly after death.
However a Discretionary Trust is exactly that. The trustees decide who inherits. They may follow your stated wishes about what is to happen but the trustees are not obliged to do so.