In Focus: Tax  

How to use trusts within estate planning

  • To understand how trusts work.
  • To learn the differences between different types of trust.
  • To be able to explain the role of the family and trustees in managing trusts.

Myth 2: Gifting into a trust means giving up all access to and control of the assets

This is another common misconception, but this is not always the case and depends on the type of trust and the intentions for that trust. Flexible reversionary trusts allow payments to be made to the settlor in future years, if required, or remain invested if not.

This type of structure can be useful for clients who are concerned that they may need access to funds in the future, for example to pay for care fees, a concern that many advisers will be familiar with.

If that happens, the reversionary payments can be used to cover those bills. If it doesn’t, funds can remain in trust for the future benefit of others.

Let’s also consider control. It is certainly true that on the establishment of a trust, the management of assets is handed over to trustees. But this does not mean the settlor has no say in what happens next.

The trust will have been set up with a clear purpose in mind. Further instruction can be clarified in a letter of wishes – for example, explaining that funds from the trust could be used to help fund a house deposit for beneficiaries in the future.

Though the letter itself is not legally binding, its contents will form the basis of how the assets are managed and distributed. This is in contrast to direct gifting to an individual where, by definition, access and control is given up along with the gift itself.

In fact, trusts are usually set up precisely because the settlor wants some say over what happens to the assets.

It is also worth considering whose access we are talking about. Access for the beneficiaries also needs to be taken into account. A significant advantage of trusts, that is often forgotten, is that trust assets are not subject to probate.

Following the death of the settlor, the trust's assets can be made available to the beneficiaries immediately should they need them. For example, they may need to pay an IHT bill based on the value of a property that could take a long time to sell.

The trustees could advance a payment to the beneficiaries in the form of a loan to settle the IHT liability and enable probate to be granted. The loan could then be repaid in due course once the administration of the estate is complete.