The Use of Trusts

An individual with assets at their disposal may be prepared to make absolute gifts of those assets to relatives or friends, as steps towards inheritance tax (IHT) planning. Whilst a direct gift has the benefits of simplicity, there are a number of reasons why an individual may not wish to make outright gifts, such as loss of control, the age or personal/financial circumstances of the donee etc.

By gifting assets to a trust rather than to an individual outright, a donor is able to remove assets from his estate, thereby triggering the "seven year clock" for IHT purposes, but is able to avoid some of the disadvantages associated with an outright gift.

Trusts have long been used as a means for people to protect their assets and to control their management, as well as determine how those assets are transferred to others and when. Flexibility and tax issues are also important factors which influence an individual’s decision for the use of a trust.

• Control

Retaining control over the management and ultimate destination of assets is an important reason for using trusts. The settlor is immediately able to divest his ownership of an asset, yet the existence of a trust prevents ownership passing straight to the beneficiaries. By retaining some form of control, the settlor/trustees decide the timing and extent of the beneficiaries’ entitlement. Therefore, ownership of trust property can be transferred over a period of time to the next generation, at the settlor’s/trustees’ discretion.

• Protection

The protection element stems from the fact that the assets do not become the property of the beneficiaries but are held by the trustees on behalf of the beneficiaries. The trustees have the responsibility of managing the assets and have a duty to protect and preserve trust property. A trust is an ideal vehicle for an individual who wishes to remove assets from their estate without passing absolute control and ownership to an intended beneficiary. This can be useful where a donor has concerns over the age of the beneficiaries, possible financial difficulties a beneficiary faces, divorce proceedings or the vulnerability of a beneficiary.

• Flexibility  

Trusts are quite often intended to run for many years. Flexibility can be useful where the settlor is uncertain as to the precise extent of each beneficiary’s entitlement at the time he makes the gift. Trusts are sufficiently flexible to allow for ever changing situations, which is important when the future needs and circumstances of the beneficiaries are not obvious at the outset, for example, providing for future generations. An outright gift offers no such flexibility.

• Tax considerations

Trusts are a means for passing on wealth and are, therefore, an effective tool for inheritance tax (IHT) planning. With careful planning IHT mitigation can be achieved through the use of trusts, but with the added benefits discussed above.  

Ward Williams has a team that specialises in Trusts. To find out more please visit our IHT section

If you wish to discuss the above, please contact Simon Boxall at simon.boxall@wardwilliams.co.uk