Estate Planning

PLEASE NOTE THAT NOT ALL OF ESTATE PLANNING IS FULLY REGULATED. I ONLY CAN ADVICE ON THE REGULATED AERAS OF ESTATE PLANNING.

Please note that the content below is just a brief explanation / information and not advice.

What are the Main Types of Trust?

Bare Trust

A bare trust, also known as an ‘absolute’ trust, is one where the beneficiary gains immediate, absolute right to the assets in the trust and the income generated. The settlor placing funds into trust must be certain that the assets in the trust will go directly to the beneficiary or beneficiaries they choose. Once this trust has been set up, the beneficiaries cannot be changed. Where the beneficiary is a minor, they can demand to take ownership of the assets on attaining the age of 18.

Discretionary Trust

A discretionary trust enables the trustees to have discretion about how the trust's income and/or assets are used. In a discretionary trust, the trustees are legal owners of the assets in the trust. They must run the trust to benefit the beneficiaries. They also have the power to appoint new beneficiaries.

Under a discretionary trust, when a claim is made on the policy, there may be tax charges on the policy proceeds. This will depend on when the benefits are paid out and on how long the policy proceeds are held within the trust. It is therefore recommended that professional tax advice is sought when assets held within a trust are to be distributed.

Split Discretionary Trust - Life & Critical Illness

A discretionary trust enables the trustees have discretion about how the trust's income and/or assets are used. In a discretionary trust, the trustees are legal owners of the assets in the trust. They must run the trust to benefit the beneficiaries. They also have the power to appoint new beneficiaries.

With a form of discretionary trust called a ‘split’ trust, the life insurance proceeds will go to the chosen beneficiaries. If any of the specified critical illnesses is diagnosed, the policy proceeds return to the life assured.

A discretionary trust enables the trustees to appoint and vary the beneficiaries. The trustees can also decide who will receive some or all of the assets, and when.

Under a split discretionary trust, when a claim is made on the policy, there may be tax charges on the policy proceeds. This will depend on when the benefits are paid out and on how long the policy proceeds are held within the trust. It is therefore recommended that professional tax advice is sought when assets held within a trust are to be distributed.

Interest in possession trusts

These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).

Example: You create a trust for all the shares you owned. The terms of the trust say that when you die, the income from those shares go to your wife for the rest of her life. When she dies, the shares will pass to your children.

Your wife is the income beneficiary and has an ‘interest in possession’ in the trust. She does not have a right to the shares themselves.

Accumulation trusts

This is where the trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.

Discount Gift Trust

Discounted gift trust with the potential to reduce your liability to Inheritance Tax and offer the opportunity for gifted capital to grow while you take income.

Loan Trust.

Our Loan Trust allows you to invest money in an investment bond and access a capital sum, while any growth on their investment is outside of your estate.

Discretionary Will Trust

A majority of couples choose to leave all of their estates to the surviving spouse on the first death, i.e. they make a will stating "I leave all of my estate to my wife/husband" provided that she survives me...".

Each individual has a £325,000 inheritance Tax Allowance called Nil-Rate Band NRB. A Discretionary Will Trust is a way by which married couples and civil partners can make use of both individuals Nil-Rate Band NRB. This means the joint NRB is £650,000.

Any couple whose total joint estate exceeds £650,000 should make a discretionary trust with their will. With the huge rise in house prices in the UK many will have estates in excess of £650,000 when you add up the value of houses, investment, life insurance and personal property.

An additional joint Residential Nil-Rate Band RNRB of £350,000 (£175,000 maximum for each from 2020/21 tax year) is added on top of the Joint inheritance tax allowance NRB of £650,000. This is provided your residential home is passed on your blood decedent (children grandchildren / adopted children). Therefore, if your estate is above £1m will be liable to 40% inheritance tax liability.

Transfers between spouses or civil partners including transfers on death are exempt from inheritance tax (subject to a limit of £55,000 if the surviving spouse or civil partner is not domiciled in the UK). Thus, there is no tax to pay when the first spouse or civil partner dies if all of that spouse's assets are left to the survivor. However, the combined estate is then taxed in full on the death of the 2nd spouse.

Where all of the estate is left to the surviving spouse or civil partner, the deceased's nil rate band is not used, except to the extent that the individual made certain gifts during his or her lifetime.

This means that by simply making a "Discretionary Will" you can save 40% of £325,000 or £130,000. It is therefore far more tax effective to use up the nil rate band of both spouses or civil partners by creating a discretionary will.

You must seek legal advice to set up a Discretionary Will Trust.

What are the benefits of trusts?

• Protection in the event of bankruptcy – Any asset held under trust will not be viewed as forming part of the settlor’s estate.
• Ability to retain control – Trusts enable people to retain control over gifted assets.
• Certainty of affairs – Trusts provide peace of mind that assets will be distributed in accordance with wishes.
• Speed of payment – The proceeds can be paid before the granting of probate.
• Mitigation of Inheritance Tax – There are many ways in which trusts can be used to mitigate the payment of Inheritance Tax.

The main duties and powers of a Trustee

• Protection in the event of bankruptcy – Any asset held under trust will not be viewed as forming part of the settlor’s estate.
• To invest the trust fund – A trustee is responsible for making sure that the trust fund is invested for the beneficiaries until the money is distributed. If the only property in the trust is an insurance plan, there will be no fund to invest until after any claim on the insurance plan. The money from the insurance plan will need to be invested until such a time as it is distributed to the beneficiaries of the trust.
• To act impartially – If there is more than one beneficiary, the trustees must not act in a way that will benefit one of them more than another. For example, if one beneficiary is to receive income from the trust but another one will receive the capital, trustees should invest the fund to produce both an income and capital growth. If the trustee invests in a way that produces just one of those, they would not be acting impartially.
• To take appropriate advice – Trustees are required to take professional advice before investing the trust fund, unless the fund is so small that the cost of the advice would outweigh any benefit or one or more of the trustees are qualified to give advice themselves. Trustees can ask a professional person to act on their behalf in investing the fund, but the responsibility for the investment would still lie with the trustees.
• To distribute the trust property – The trustees should ensure the trust property is passed to the beneficiaries at the appropriate time.
• To keep the trust’s property secure – Trustees are responsible for making sure that the trust fund is secure. Should the fund include something tangible, such as a house, they are responsible for making sure that it is insured.
• To keep the trust’s records – Trustees must keep a record of any decisions they make and any actions they take. This includes records of any investments they make and any money they pay out to a beneficiary. Trustees should also keep records of the advice they have received and any costs the trust has had to pay.
• To not profit from the trust – Trustees acting in a professional capacity can claim reasonable fees for their services, but they must not manage the trust in such a way that they receive additional remuneration.
• Other powers – The trust document may set out other powers a trustee has, such as the power to change the beneficiaries. This can be very useful if the settlor’s circumstances change, for instance if they have another child, remarry, or fall out with one of the beneficiaries.
  The trustees of a discretionary trust have the power to lend the trust funds to potential beneficiaries of the trust. It is recommended that the trustees seek appropriate legal and other professional advice before exercising this power.
  While the settlor is still alive they may hold some powers that other trustees don’t have, such as the power to appoint or remove trustees. These powers may be handed on to the other trustees if the settlor dies.

https://www.gov.uk/trusts-taxes/trustees-tax-responsibilities