Trust in a better inheritance
Some careful planning can ease the financial pain of inheritance tax.
The only certainties in life are death and taxes, according to Benjamin Franklin. He should have added another to the list: that none of us will do enough to plan for these two inevitabilities.
A trust is simply a gift with strings attached.
Every trust will have three parties: the ‘settlor’ establishes the trust, by putting some or all of his or her assets into it. He or she will have a trust deed drawn up, which explains who can be ‘beneficiaries’ of the trust as well as when and how they can become entitled to benefit from the trust. It will be overseen by ‘trustees’, who will ensure that the assets are safeguarded and that payments are made in accordance with instructions or guidance.
This is understandable: while death may be certain, it is not something most of us like to think about. Yet a bit of forward planning will not only ensure that you choose the most effective way to provide for your loved ones when you die, it can also keep the tax bill to a minimum.
The most effective planning tool in the inheritance armoury is the trust. Trusts may sound complicated, but they are simply a way of passing on wealth while retaining some control over how it is used and who it goes to.
Trusts can be set up to:
Protect your assets
Guarantee an income for your loved ones
Help to avoid inheritance tax
Discretionary trusts are the most commonly used type, largely because of the tax advantages: assets put into these trusts escape inheritance tax completely for their entire duration, up to 125 years.
Along with your trustees, you will have full flexibility over deciding who gets what and when. On your death this control passes to the remaining trustees. That is why so many of those who set up trusts accompany it with an expression of wish letter, which gives trustees guidance on what you as ‘settlor’ would have wanted. While these are not binding on the trustees they are, in practice, usually followed.
Not surprisingly, the tax breaks on discretionary trusts are not completely unrestricted – so it’s worth seeking advice.
Before considering discretionary trusts, there is a range of other exemptions and allowances that should be used fully. But the first action is simplest: make a will. This will avoid a complicated administrative burden as well as the potential for a larger than necessary tax bill.
Everyone has an annual allowance of £3,000 in each tax year – indeed, you can also give away as much as you want tax-free, provided you expect to live for at least seven years after the gift; die before that and you will be charged, although your bill could be reduced by taper relief, under which the rate of tax is gradually reduced.
Using trusts can be complicated and you should take expert advice. Consult your St. James’s Place Partner if you would like more information.
Putting life insurance in trust
- Most people have a lot to gain by putting their life insurance policies into trust.
- Putting a life policy in trust means it remains outside your estate, so payouts can be protected from Inheritance Tax.
- Without doing it, your £500,000 policy could be worth just £300,000. It may even end up in the hands of the wrong people.
Payouts from the policy are usually made more swiftly when it is put in trust, because there’s no waiting for probate to pass before benefits can be distributed.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.