Trusts are not just for the rich
Pablo Picasso left his family in a right pickle when he died: although he left behind a fortune in artwork, bonds, property, cash and gold, he left no instructions on how it should be distributed.
The ensuing battle took six years and cost £17.5 million to sort out, and his assets were eventually distributed between six heirs.
But he was far from alone in leaving his family to sort out the finances after a loved one's death.The fight over Jimi Hendrix's assets took 30 years, and Bob Marley, whose estate was reputed to be worth about £18 million, had dozens of claimants.
Wealth aside, most parents would like the financial support they have provided during their lifetime for their children to continue after they die and to think that their assets can be distributed to their loved ones without bad feelings or distress. But few take the two straightforward – but essential – steps to ensure this happens.
By writing a will and establishing a trust, you can make sure that your children, grandchildren and future generations to come can benefit from your wealth in the way that you wish.
Trusts are commonly associated with huge wealth, and families with more moderate assets and level of income might not consider them appropriate. But you don't have to be incredibly rich for your family to benefit from the creation of a trust, says Alexandra Loydon, head of private client services at St James Place Wealth Management.
She says: "Trusts are no longer the preserve of the wealthy; they offer long-term asset protection and preservation for families with more modest estates and I recommend their use to a wide range of clients – from those leaving a nest egg of £10,000 for a grandchild to parents leaving a £200,000 property to a grown-up child.
"Tax mitigation is not a primary driver for the use of trusts for many, but protecting young or vulnerable beneficiaries and preserving family wealth in the event of, say, a divorce, are becoming more prominent reasons for clients to consider using trust-based planning, either during lifetime or in their wills.The key is getting the right advice."
What is a trust?
A trust is a legal arrangement which allows assets – usually property or money – to be looked after by trustees for the good of one or more beneficiaries. Those beneficiaries can be named individuals – your children – or can be people who are not even born yet.
They are usually set up in conjunction with a will, and can be used for several purposes:
- to protect assets until a beneficiary reaches the age of 18;
- to reduce inheritance tax (IHT) liability by taking assets out of your estate and reducing the amount on which IHT might be due;
- to provide for your husband or wife while keeping the assets intact for the benefit of your children;
- and to protect the family home from being sold to pay for residential care.
There are several types of trust, and the one you opt for should depend on who the beneficiaries are, what the assets are and how and when you want them distributed.
The most commonly used structure for transferring assets to children is the bare trust. Assets are held in the name of the trustees, who manage and make decisions about the trust until the beneficiary reaches the age of 18 (or 16 in Scotland). At this point, the beneficiary can demand that the trustees transfer the trust fund to them. Other trusts include:
- interest in possession trusts, where the beneficiary is entitled to all the income after expenses but the assets are kept intact for future beneficiaries.
- accumulation and maintenance trusts – often used to provide ongoing income for children to cover living costs and school fees.
- discretionary trusts, where the beneficiaries are named but the trustees can decide how much income and/or capital should be paid out to each according to circumstances.
- trusts for disabled beneficiaries, which are discretionary trusts with special tax exemptions, often used to hold financial compensation awards.
Visit gov.uk/trusts-taxes/types-of-trust to find out more about the types of trusts available on the HMRC website.
How to set up a trust
If you decide to set up a trust, you will have to appoint trustees whose job it is to look after the assets in the trust for the beneficiaries.
They will have the power to make investments and must advice on how to manage them and review them regularly. They must also make payments from the trust in line with the instructions you set out in the trust deeds.
It's a good idea to have between two and four trustees, who you consider to be trustworthy and honest, who have the best interests of the beneficiary at heart, have some experience with financial matters, and can be expected to outlive you. A family member and a solicitor is a very common combination but bear in mind that the solicitor will charge.
The legal wording for the trust needs to be very precise, and getting the choice of trust right for your (and your family's) needs is really important, so it is absolutely vital to consult a solicitor.This will inevitably push up the cost of sorting out your financial affairs.
Loydon estimates that incorporating a trust in a will can cost about £1,000 but provided you get it right it could preserve your wealth and help support your family for generations to come.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.