A trust is an agreement between several individuals – the settlor (the person establishing the trust); the trustees (the persons who will look after and manage the assets in trust); and the beneficiaries (who will benefit from the assets held in trust). Instead of your house being owned by Joan Smith, for example, it would be owned by the Joan Smith Family Trust. Trusts have been around since the days of the Crusades so they are, in no way, a new concept.
One significant benefit of having a trust is that it allows your assets to be handed down through the generations to your beneficiaries at a time most convenient to them – for example, not at a time when the beneficiary is going through a divorce, is experiencing financial difficulty or is living abroad in an unfamiliar tax jurisdiction for example.
An easy way to understand the concept of trusts is to think about car financing, which operates in a similar way. If Joan Smith has a car on a personal contract purchase (PCP) plan, she will not own that car. The legal owner would be the finance company. However, the car still does its job perfectly well, and is available any time Joan wants to use it. It doesn’t really matter to anyone that she is not listed as the legal owner.
So who does own the assets held in a trust?
The trust exists as a separate legal entity and so the assets are owned by the trust itself. The trust will have trustees – these are people selected by you, the settlor, because you trust them to carry out your wishes.
The principal thing to remember with trusts is that because you do not own the assets held in the trust in your own name, it is more difficult for those assets to be taken away from you or from the beneficiaries of the trust.
When are trusts useful?
These are the most common situations in which having a trust ensures that your assets go to the people you love the most.
Trusts are often referred to as ‘bloodline planning’ because they ensure that your money remains with your blood relatives when you’re no longer around.
That might not be true if one of your children got divorced. It wouldn’t even be a huge surprise, given that 45 per cent of UK marriages sadly end that way.
Without a trust, Mr or Mrs Wrong would walk away with as much as half the assets handed down to your child, which is probably not what you want at all. Thanks to the trust, Mr or Mrs Wrong may not get any of your assets.
Let’s say you’ve passed away and left all your assets outright to your children. Your children use the money to start a business but, sadly, their business fails.
Now the creditors show up. Without a trust in place, the creditors can take everything: the car, the TV and even your child’s home.
Trusts may stop this financial tsunami.
3. Marriage after death
The sad truth is that the people who suffer the most after we’re gone are our partners.
But after the initial shock has passed, your partner may start to feel lonely. Some may go on to find someone new and might even get re-married. It’s completely understandable.
But what happens if your former spouse dies before their new partner? In that situation, your entire estate could go out of the door with Mr or Mrs New. Nothing would be left to any of your adult children.
This can easily avoided with a trust in your Will. It ensures that your money passes to your children after the death of your partner.
4. Long Term Care
Thanks to healthier lifestyles and medical advances, people in the UK are living longer.
A newborn boy can now expect to live to 79.2 years old and a girl 82.9 years old, compared to just 68.1 and 74 if they’d been born in 1960.
This also means that many more elderly people need places in care homes, and local authorities are having to find the money to pay for them.
The way they’re doing that is shocking.
After your death, they will take your home and sell it to pay for the cost of your care. Unless, that is, your house and all your other assets are worth less than £23,250.
It’s pretty unlikely that your house would be worth less than £23,250. So chances are that the local authority will take it, sell it, and grab back the care fees.
After they’ve taken those fees – potentially from several years’ worth of care – there could be very little left for your loved ones.
When set up at a time when the need for care and support is not reasonably foreseeable and where avoiding care costs is not a significant reason for setting up the trust, it is possible that your assets may be afforded some protection against the ravages of long term care costs.
5. Inheritance Tax
We all have to pay inheritance tax if the value of our estate is above a certain threshold, which is called the nil rate band.
That nil rate band is £325,000 per person, and in 2017 the government added an extra £100,000 to this for homeowners.
For a married couple with a property, their combined nil rate band is simply the individual amounts added together.
This rises by £25,000 per person over the three years until 2020, when the amount will be frozen. Currently the nil rate band for property-owning married couples is £950,000 rising to £1,000,000 on the 6th April 2020.
One million pounds! It sounds like a lot. But imagine what would happen if the NRB remains unchanged for the next 15 years.
If house prices increase as much in that time as they have over the previous 15 years, there’d be a huge inheritance tax claim on your estate.
Trusts – when carefully constructed and often combined with financial advice – may help to reduce the value of your estate for inheritance tax purposes if you survive for 7 years after having set up the trust.
Act now to protect your assets
Putting your property inside a trust will ensure your loved ones benefit from your property instead of the tax inspector.
We can go through the options with you, to make sure you choose the right trust for your circumstances.