A trust is a legal arrangement in which one person or group of people holds and manages assets for another person or group of people. A trust will have a beneficiary or beneficiaries, who are the person(s) for whom the trust was established. In this blog post, we answer the question, “What is an estate planning trust?”
What Is A Trust?
A trust is a legal arrangement in which you transfer assets (money, possessions, and property) to another person or persons for the benefit of a third person. There are several roles to understand when creating a trust for estate planning purposes:
- The settlor is the person who establishes the trust.
- The beneficiary is the person or people for whom the trust is created, and the trust’s assets are held within the trust for the beneficiary’s benefit.
- The trustee is the person in charge of the trust’s assets. This person is given ownership of the trust assets, including the ability to buy, sell, and invest in them.
When assets are placed in a trust, you no longer own them.
When you create a trust, you can specify the rules. The trust agreement will specify what happens to any funds, real estate, or investments held in the trust. A trustee is obligated by law to look after and manage your estate on behalf of the beneficiaries.
A trust is useful if you want to leave assets to a beneficiary until they reach the age of majority. For example, you may want your children to have access once they are mature enough to manage their own assets. It can also help you save money on Inheritance Tax, though the law in this area is complicated and you should always seek professional advice.
What Is Inheritance Tax?
Inheritance Tax is a tax levied on your estate after you die. If the value of your estate is less than £325,000, or if you leave everything above this threshold to a spouse, civil partner, charity, or community amateur sports club, you will not be required to pay this.
On the government website, you can learn more about valuing your estate for Inheritance Tax and reporting its value.
There are additional complicated rules that count assets held in certain types of trusts or given away before death towards the £325,000 threshold. There are also exemptions for your family home, business or agricultural assets, or woodland.
Types Of Estate Planning Trusts
Because there are many different types of trust, you should seek professional advice to determine which structure is best for you. Simple trusts will be less expensive, whereas more complex trusts may be more expensive. If you want to set up a trust, you should consult with a lawyer about how to do so and the tax implications.
The following are some of the most common estate planning trust structures:
Discretionary trust
This trust means that the trustees have the final say on how the trust’s assets are distributed to the beneficiaries you’ve named in the trust. This trust is very common because it protects beneficiaries from inheriting money too quickly or at an inappropriate time, and it can provide some tax relief.
Bare trust
This is the most basic and straightforward trust. Any beneficiaries who reach the legal age of 18 in England and Wales will be able to access the trust’s assets. The beneficiary must also be deemed mentally capable, implying that this is not the appropriate trust for a vulnerable individual.
“Interest in possession” or “life interest” trust
The beneficiary is entitled to income from investments in this type of trust, as stated in the name, or to live in property held by the trust, but they cannot access the property, investments, or cash that are generating income without the trustees’ permission.
Vulnerable person trust
A trust for a bereaved child (i.e., one established under a deceased parent’s will or intestacy) or a disabled person may qualify for special tax treatment. When a vulnerable person is the sole beneficiary, they usually pay less tax.
Talk to Us
If you would like to speak to a solicitor about setting up a trust, get in touch with MWQ today.
