Inheritance Tax  

Trusts: What you need to know

This article is part of
Intergenerational wealth planning (Part I)

Trusts: What you need to know

Clients can consider putting assets into a trust and, if this is structured correctly, assets placed in a trust will not be subject to inheritance tax.

When should a client think about setting up a trust, how expensive and time consuming is it, and when is it worth the effort?

“Generally, trusts mean people can give money away to help reduce the value of their estate and therefore IHT that may be due,” says Laura Suter, personal finance analyst at AJ Bell.

She explains: “Trusts are often seen as something only for the super-rich, but they can actually be used for more everyday finances, such as helping towards the cost of university for a grandchild or to hold life insurance payouts on death.

“Because the rules around trusts can be very complicated, it is an area where seeking professional advice will pay off.”

She adds: “There are of course costs associated with doing so, and setting up and maintaining trusts, and the more complex the structure the higher these costs are likely to be, so you need to balance the value of the estate with the potential tax saving from opening a trust.”

Fear of complexity

According to Tracy Crookes, financial planner at Quilter Private Client Advisers, trusts often cause apprehension, or the “fear is that they are too complicated and too expensive, but this isn’t always the case”.

Ms Crookes says: “Yes, there are occasions where a complicated trust is needed. This is dependent on personal circumstances and intentions but, in many instances, platforms and providers have standard trust solutions that meet customer needs and these can be obtained with appropriate advice.”

Philip Whitcomb, partner and head of rural private clients at Moore Blatch, says: “In recent years, trusts have received bad press but they are still highly useful, particularly when considering asset protection. 

“If you have concerns about the financial security of the intended beneficiaries or they may go bankrupt or, quite often, there are concerns about the daughter-in-law or son-in-law, then a trust can assist in protecting the capital for your family.”

He suggests that, as families are becoming more complex, with second marriages for example, trusts can be used to ensure assets are passed to children.

Key points

  • Trusts can be used to protect a client’s estate.
  • They do not have to be too complicated.
  • Using a trust can be expensive but worthwhile.

According to Mr Whitcomb, the most common mechanism is a life interest trust.

“This allows a second spouse to enjoy an income from the assets or the right to live in the property during his or her lifetime but, after their death, then the assets revert to your blood children rather than perhaps to the spouse’s own children,” he explains.

He adds: “If [your clients] can give up capital, consider a discounted gift trust.