During a recent survey by Canada Life, on the use of estate planning tools, 19% of the consumers questioned said that they felt setting up a trust was too time consuming or complicated.
Let’s look at trusts and unravel this misconception because, although it is possible to create a very complicated trust, for the majority of individuals a straightforward simple trust can suffice. We will start by explaining what a trust is and what it can do.
A trust is a legal obligation concerning a gift of property (and by property we are not just talking about bricks and mortar – it can by anything – cash, investments, jewellery, antiques, and so on). The details of the type of trust and its purpose or objectives should be in writing, usually in the form of a trust deed.
There are three parties to a trust:
• The settlor(s) (or donor(s)) – the person(s) making the gift
• The beneficiary (or beneficiaries) – the people eventually receiving the gift. Depending on the type of trust chosen (see below), the beneficiaries can be individually named or they can be covered by a “class” – for example you could have “all my children whenever born and all my grandchildren born during my lifetime (or whenever born)” as beneficiaries. In general the settlor should not be a beneficiary.
• The trustees – the people looking after the gift while it remains in the trust. The trustees become the legal owners of the trust assets and they deal with the assets until they are distributed to the beneficiaries. A trust can last anywhere between several months right up until 125 years!
Where someone is looking to gift investments into a trust, they can usually get the trust deed, free of charge, from the company providing the investment. This provides all the necessary wording – stating what the trustees can do with the investments and specifying the settlor(s), the trustees and the beneficiaries.
The settlor and trustees complete the trust deed and the application form for the investment and send these with the monies (cheque or bank transfer) to the investment provider, and the trust will start as soon as the paperwork is processed and the investment is completed.
Thereafter, the trustees will look after the investment. Depending on what type of investment they have chosen, and the value of that investment, they may wish to use the services of a professional adviser unless they feel that this is unnecessary or inappropriate. A professional adviser could provide a similar annual review service to the trustees as he provides for individual clients – but not every trust needs a professional adviser as it depends on the value of the trust assets and the experience of the trustees.
The trustees would then distribute the trust assets, at the appropriate time, to the beneficiaries.
So, if you have decided to gift something away, why would you want to put it into a trust rather than give it directly to the beneficiary?
There are various reasons why trusts are used:
- perhaps the beneficiary is still a child and too young to look after that asset (or large sum of money)
- perhaps you want to wait until they reach a particular age (21 or 25) or a particular stage in their life (buying a car, deposit on a house, getting married) before giving them a monetary gift
- a trust allows you to retain some control of the asset after you have ‘gifted’ it – the settlor can also be a trustee
- you may wish to reduce your inheritance tax liability when you die. Generally, inheritance tax will be payable at 40% on your estate, in excess of any available nil rate bands (standard or residence nil rate bands.) When you make a gift, either directly handing that gift to the individual or by placing it into a trust, the initial value of that gift will remain in your estate for seven years before it drops out of your inheritance tax calculation.
Type of trust
There are various types of trust but we are just going to look at two types here: absolute trusts and discretionary trusts.
An absolute trust can be for one or more named beneficiaries and they have an entitlement to their share at age 18. Therefore at outset you name the beneficiary and their share and that can never change. If you set up an absolute trust for two grandchildren – say Neil and Kim – with 50% going to each, then they could each receive their 50% of the trust fund when they reach age 18.
Absolute trusts are therefore often used for beneficiaries who are under age 18 when the trust starts and the trustees’ duty is to look after the trust assets until that child reaches 18 and then pass the assets to them. Once the assets have been distributed to the beneficiaries, the trust comes to an end.
A discretionary trust is much more flexible and it has more than one beneficiary. No beneficiary has a right to any of the trust assets or income as the trustees have full discretion to choose from a range of beneficiaries. That means that no beneficiary can demand a share of the trust assets at 18. Depending on how the trust is worded, the trustees can decide when a beneficiary is going to receive a benefit and how much that benefit will be. Beneficiaries do not need to be named as you can use “classes” of beneficiary – such as “all my children whenever born”, “all my grandchildren” as mentioned above but they could also include other classes such as “all my nieces and nephews born during my lifetime”, “all my brothers and sisters”, etc. This allows the trustees to choose any beneficiary from the list of potential beneficiaries. A discretionary trust can run for up to 125 years – allowing the trust assets to be used for future generations (grandchildren, great grandchildren, and so on). Therefore, someone with a large estate who currently has an inheritance tax liability could decide now to put money into a discretionary trust to start that seven year clock ticking without having to decide who will ultimately benefit from the trust (any one or more of the potential beneficiaries can benefit – but there could be beneficiaries on the list who never receive a benefit), when they will receive that benefit (any time in the next 125 years) and how much they will receive (the trustees could have complete discretion – and this is one of the reasons the settlor may also wish to be a trustee – so that he/she retains some control over who benefits and when).
Hopefully, you will now have a basic understanding of what a trust is and how it works and the fact that not all trusts are complicated and time consuming. On the basis that HM Revenue & Customs (HMRC) received £4.67bn* in inheritance tax receipts in 2015/16 and they expect that figure to rise to £6.2bn in 2021, do you really want the taxman to benefit from your estate when you die, or would you prefer your family and loved ones to benefit instead?