Trusts and estate planning

When you're planning to leave an inheritance, two things are essential.

You want to ensure that the right people inherit your wealth according to your wishes, and you'll want to minimise the amount lost to inheritance tax (IHT).

To achieve these goals, you’ll need an up-to-date will, and you can reduce the size of your taxable estate, for instance, by making gifts during your lifetime.

However, sometimes, these measures alone may not be enough to achieve your goals.

If so, your adviser may recommend that you use a trust.

What is a trust?

A trust is a legal arrangement in which a ‘trustee,’ which may be one or more individuals or a company, keeps assets for the benefit of a ‘beneficiary’ (usually one or more individuals).

The assets, usually money, property or investments, may eventually pass to the beneficiary (for example, when they reach a certain age) or may be held indefinitely to provide them with a specific benefit (e.g. a place to live or an income).

Trusts are often used when the beneficiary isn’t able to manage the assets themselves, for example, if they are dependent children.

Placing assets into a trust will also ensure they are reserved for that particular beneficiary rather than being spent or otherwise disposed of.

Last but not least, trusts can be used to reduce your IHT bill.

How can you use trusts to reduce inheritance tax?

When you place assets into a trust, you are no longer their owner (the trustee is).

The assets are, therefore, not part of your estate and so will not be subject to IHT when you die.

A trust can also help your beneficiaries pay an IHT bill. You can set up special life insurance to pay into a trust, so it falls outside your estate, and and covers the amount to be paid.

How do I set up a trust fund?

There are several types of trusts, suitable for different purposes.

For instance, you may want the beneficiaries to inherit as soon as you die or only once they reach a certain age, or you may want a trust to hold onto assets but only pay an income.

Generally you can tailor a trust to suit your particular circumstances, so ask your solicitor about which type will be most suitable.

You can set up a trust at any time, or write one into your will.

Trusts set up as part of a will may have the executor as trustee, but you can choose another trustee if you wish.

Remember that the assets you place into the trust will no longer be yours, so make sure you won’t need them anymore.

The laws surrounding trusts are complex, especially concerning inheritance tax.

If you make a mistake when setting up a trust, it could create a tax bill for you, so consult a solicitor whenever you're considering this option.

Get expert financial advice

Using trusts effectively can be a powerful way to manage your estate and reduce inheritance tax, but navigating the complexities requires careful planning.

By understanding the different types of trusts and their potential impact on your estate, you can make informed decisions that align with your goals and ensure your assets are distributed according to your wishes.

Always consult with a solicitor or financial adviser to tailor the trust to your needs and stay updated with any changes in tax laws.

Unbiased will match you with a financial adviser for expert financial advice tailored to your estate planning needs to help you navigate the complexities of trusts and inheritance tax with confidence.

If you found this article helpful, you might also find our articles on business property relief and estate planning for blended families informative too.