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Peter DanielPartner - Head of Private Wealth
Creating a lifetime trust, such as a family trust, can help ensure that your financial assets pass tax-efficiently to your loved ones while protecting your estate from residential care fees them from risk from others and themselves. We can help you plan ahead and preserve family wealth for the next generation.
What is a family trust?
A family trust is a legal arrangement where an individual or group of individuals, known as trustees, are appointed to hold and manage assets on behalf of the trust’s beneficiaries. Trusts are typically established for the benefit of your immediate family, such as children or grandchildren, but they can also be set up more broadly to benefit friends, charities or other causes.
Why set up a family trust?
There are numerous reasons to set up a family trust. They include:
- ring-fencing assets for the benefit of future generations
- passing wealth to children or grandchildren but not until they are older
- protecting the vulnerable
- the disabled
How do family trusts work?
You have the choice of several family trust structures. The one you choose will depend on your individual situation and the goals you have for your estate.
The most common type of family trust is a discretionary trust. This type of trust gives trustees broad discretion about how the trust’s assets can be distributed among beneficiaries. A discretionary trust is an excellent option if you are not sure what your beneficiaries will need in the future as trustees have the flexibility to distribute funds when the need arises, such as when a beneficiary gets married or starts university.
Another option is a bare trust, where trustees manage the trust’s assets until a minor beneficiary is old enough to receive them.
You might also consider an interest in possession trust which gives the beneficiary an income before the trust’s assets distributed, or a mixed trust which combines elements of different types of trusts to meet your needs and situation.
Once you have established your goals, we can advise you on the most suitable type of trust. We can also provide advice on related issues such as inheritance tax planning.
How do I create a family trust?
You will need help to set up a family trust. The rules and regulations surrounding trusts and their taxation are complex and you need to ensure that everything is properly documented.
To create the trust, there will be a deed setting out the goals of the trust and who will benefit from it. You will need to list the assets that you plan to transfer into the trust and know which beneficiaries have the right to benefit from those assets and in what percentages in the future. You also need to appoint trustees who will be responsible for managing the trust. Trustees can be family members, friends or professionals such as solicitors.
What are the tax consequences of creating a family trust?
One of the main reasons for setting up a family trust is to reduce the inheritance tax liability payable on your estate when you die. The exact tax consequences will depend (amongst other things) on the type of trust that you choose to make, the amount of the loss in value to your estate and the value of the assets inside the trust.
Generally a transfer of assets to a family trust is chargeable to inheritance tax. The rate is 20% above the nil rate band available to you at the time (currently a maximum of £325,000) unless an exemption or relief applies. One of the situations where an exemption is available is when assets are placed in a bare trust as long as you survive for seven years after transferring the assets. Once the trust has been created then with the exception of a gift to a bare trust there may be exit charges when distributions are made and at each 10-year anniversary. This can be up to 6% of the trust’s value above the nil rate band .
We can advise on how to minimise taxes due on the trust’s assets when transferring them. To find out more about how we can help, please do not hesitate to contact us.
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