How to use trusts within estate planning

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.

Contrast this with an AIM (Business Relief) qualifying investment, which may qualify for IHT exemption, but which cannot be encashed and distributed until the IHT liability on the remaining estate and probate is resolved (unless the AIM/Business Relief-qualifying investment were held in a trust). 

Myth 3: Trusts are the slowest way to mitigate IHT

When assets are gifted, it can take a full seven years for them to become completely exempt from IHT, at which point there will be certainty of planning.

But if gifts were made from surplus taxable income, did not affect the settlor’s standard of living and were intended to be made regularly, they will be immediately exempt from IHT under the normal expenditure from income exemption.

This exemption also works with trusts. Gifting surplus income into a flexible reversionary trust might be a useful consideration where it is not appropriate to gift that money directly to a beneficiary at that time, or if the settlor wishes to retain potential access to that money at some point in the future.

Should the settlor die within seven years of a chargeable lifetime transfer, with no prior gifts in account, the trust will use up the available nil-rate band, and no IHT will be payable (on gifts up to the available NRB).

The NRB that has been used will not be available for use by the rest of the estate. For chargeable gifts made in excess of the NRB, taper relief may be available.

Once the inter-vivos period has elapsed, gifts are outside the estate for IHT purposes.

Bear in mind even where it takes the full seven years for a gift to be outside of the estate for IHT purposes, there is no negative tax consequence compared to if the gifts were not made into trust. 

The seven-year (‘inter-vivos’) rule is often compared with the rules that apply to Business Relief (BR) and Agricultural Relief (AR) investments.