How could trusts help you protect your money for your family?

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Estate planning is a key part of your financial plan.

Without creating a comprehensive estate plan, your intentions for your money might not be carried out on your death.

This may see your money divided in a way that you wouldn’t have chosen. It could also see the government become your biggest beneficiary on your death, with 40% of your estate lost to Inheritance Tax (IHT).

That’s why you may want to consider trusts as part of your estate plan.

Trusts can be an effective tool for ensuring your loved ones receive your wealth, while also potentially reducing an IHT bill.

Read on to find out how trusts can help you protect your money for your family.

What is a trust?

When you put money or assets in trust, you create a legal framework that “locks” that wealth away for someone of your choosing.

You are known as the “settlor” of the trust. You put what you would like to be passed on, such as money or assets, into the trust for someone of your choosing, known as a “beneficiary”.

You then appoint a “trustee” to oversee these funds. It will be your trustee’s responsibility to oversee the trust. Depending on what type of trust you choose, your trustee may also be tasked with giving your beneficiary access to the wealth contained within the fund.

Prevent disputes within your family

Trusts are useful for a variety of reasons, one of which is helping to make it clear who’s entitled to what on your death.

When money is held in trust, you can be entirely sure that only your chosen beneficiary will be able to access it and inherit the wealth you’ve set aside for them.

This can help to avoid family infighting on your death, as there can be no doubt as to who will receive what if it’s contained in a trust.

Secure your money from third-party claims

Another reason that you may want to consider a trust is if there’s a chance of a third-party claim to your wealth.

For example, if you’ve been married before, you may have stepchildren or a former spouse who think they’re entitled to your wealth.

By putting your money in trust, you can be certain that only your chosen beneficiaries will be able to inherit your money.

Trusts allow you to choose exactly who you want to receive your wealth, ensuring your chosen beneficiaries will receive the wealth that you want them to.

Potential Inheritance Tax benefits

Aside from protecting your money, there are also potential IHT benefits to putting money in trust.

As of the 2021/22 tax year, the IHT rate in the UK is 40%. You do have a nil-rate band (NRB) of £325,000 where no IHT is due, and potentially a residence nil-rate band (RNRB) of a further £175,000 if you pass your main residence to your direct descendants.

This means you may be able to pass on up to £500,000 of your money tax-free, or up to £1 million if you have a spouse or civil partner with remaining unused NRB.

However, for any value of your estate above these thresholds, you’ll be charged 40% IHT.

Meanwhile, trusts can potentially be a tax-efficient option to pass on your wealth.

When you put assets in trust, you’ll be charged 20% IHT if the value of these assets exceeds your NRB. Then, on each 10-year anniversary of the trust, you’ll pay 6% of the value in IHT too.

Finally, when the trust is settled, there will be a final 6% IHT charge based on the most recent valuation of the contained assets.

This could potentially reduce your IHT bill by as much as 14%, depending on how soon your beneficiaries receive their money after you put it in trust.

Types of trust

There are seven main types of trust that you might use in the UK.

Bare trusts

A bare trust means assets are held in the trustee’s name until the beneficiary turns 18 in England and Wales, or 16 in Scotland.

This makes them useful for those who want to set aside their wealth for their children until they’re adults.

Interest in possession trusts

Interest in possession trusts mean a trustee must pass on all trust income directly to the beneficiary as it’s accrued in the trust.

For example, if you put your stocks or shares in trust, the income from them would go to your chosen beneficiary, while the investments themselves would not.

Discretionary trusts

A discretionary trust allows a trustee to make decisions about the contained assets, such as what gets paid out or how often payments are made.

These can be useful for beneficiaries who may need guidance for their future, such as younger grandchildren. It can also be useful for beneficiaries who are unable to make financial decisions for themselves.

Accumulation trusts

Accumulation trusts allow a trustee to accumulate and add income to the trust’s assets or capital.

Like discretionary trusts, the trustee may also be tasked with paying income out to the beneficiaries.

Mixed trusts

As the name suggests, mixed trusts are a combination of more than one type of trust.

For example, you could have an interest in possession and accumulation trust.

Settlor-interested trusts

Settlor-interested trusts are for when you, the settlor, benefits from the contained assets.

For example, if you were no longer able to work due to illness, you could set up a discretionary trust where your trustee pays out an income for you to live on.

Non-resident trusts

Non-resident trusts are for when trustees are not resident in the UK for tax purposes.

Make sure you take financial advice before choosing this type of trust, as the tax rules can be complicated.

Work with us

If you’d like to find out more about how trusts could help you and your family, please get in touch with us at Novus.

Email info@novusfs.co.uk or call 01423 870731 to speak to one of our advisers.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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