Using Trusts To Protect Assets For Children And Inheritance Tax Planning

You’ve worked hard for your money and now you want to protect your assets for your loved ones.

People use Wills to ensure their assets are distributed as per their wishes when they die. But if your assets have already been eroded you may find you won’t be able to pass on as much as you’d like.

This is where trusts come in yet many people are confused by what trusts are and how they work.

Put simply, they are legal documents drawn up to protect your wealth and to keep your tax liabilities to a minimum, including reducing your Inheritance Tax bill.

Common scenarios where trusts are particularly useful are: divorce, providing for a child who will be unable to look after themselves in later life, bankruptcy and ensuring care costs are met.

Trusts used to keep your family assets secured are often used as part of what are called ‘bloodline planning’ strategies by financial and estate planners.

There are a wide variety of different trusts available and the one that’s right for you will depend on your individual circumstances.

These are some of the commonly used trusts:


A Bare – Or Simple – Trust

This is the simplest trust available and can often be set up relatively cheaply depending on your circumstances.

Bare trusts are mainly used to transfer assets to children with the trustees looking after the assets until the beneficiary turns 18.

The trustees don’t perform any active duties with the trust and have no say over the assets held within it.

Everything held in the trust is immediately passed to the beneficiary when they’re 18.


Interest In Possession Trust

With this type of trust there are two categories of beneficiary: income beneficiaries and capital beneficiaries.

The trustees pass any income from the trust to the income beneficiary after deducting any costs or expenses they incur. The beneficiary is liable for any income tax payable on the money received from the trust.

For life interest trusts when the income beneficiary dies, what’s left in the estate passes to the capital beneficiary.


Discretionary Trust

The trustees are given absolute power to decide who benefits from the income and capital in the trust.

Often the person setting up a discretionary trust writes a letter of wishes which sets out the exact powers the trustees have.

For example, if your children are named as beneficiaries the trustees could decide exactly how much is given to each child and when.


A Mixed – Or Hybrid – Trust

The trusts mentioned above are just a few of the more common trusts available but there are many others. It’s possible to create a mixed trust which combines elements from different trust to cater for your specific circumstances.


Using A Trust To Reduce Inheritance Tax

In most circumstances, as soon as money or a property is put into a trust it is removed from your estate for Inheritance Tax (IHT) purposes because it no longer belongs to you.

Placing assets into a trust means that you are granting permission for a third party (the trustee) to manage those assets for the benefit of someone else (the beneficiary).


Bloodline Planning

Simply gifting cash, property or other assets to family members means that they are at risk from factors such as divorce, remarriage or bankruptcy.

Using a trust can protect your wealth from claims from people such as ex-partners or creditors.

Once your assets are in a trust and out of your estate it means they are offered protection from these claims.

This ensures your assets are kept within your family and not diluted to a point where there’s nothing left.


Income From – And Loans To – A Trust

Many people might find it hard to lose access to capital or income from the assets they gift which is why there are trusts available that allow you to continue receiving an income from these assets.

Additionally, you could make a loan to a trust where any capital growth in the value of the assets is gifted while the loan is repaid to you.


How Much Does It Cost To Set Up A Trust?

How much you’ll need to spend depends entirely on the complexity of your circumstances and the kind of trust you need.

Additionally, the law surrounding trusts is extremely complex and there is a risk of an immediate tax liability if it is not set up correctly.

Get in touch

We can offer help and advice on setting up a trust to protect your family’s estate in Wokingham, Berkshire, Reading, Surrey, Hampshire and across the South East.

For an informal, no obligation chat about your needs please email or call 0118 974 0134.