Creating a Trust – When is it worth it?

The creation of a lifetime trust, in times past, was revered as a sensible structure to shelter assets from the unstoppable tide of inheritance tax (“IHT”). Historically, certain trusts achieved favourable IHT advantages and allowed families to preserve family wealth and filter it down through the generations. However, Trust law has changed considerably over the years, with the result being that creating a Trust during lifetime is now significantly less favourable than it once was.

In this short guide to trusts, we’ll look at the advantages and disadvantages of creating a trust. Once equipped with this knowledge, you’ll be in a position to make an informed decision whether it’s the right option for you or not.

What is a Lifetime Trust?

The basic concept of a Trust is that it is a vehicle which is created by an individual (known as the “settlor”) to receive and hold assets for the benefit of other individuals (known as “beneficiaries”).  The assets gifted to the Trust are held by Trustees, who are appointed by the Settlor. The Trustees then administer the Trust in accordance with the terms of any Trust deed (taking into account the wishes of the person who created the Trust).

The Trust deed governs how the Trust should operate.

Why create a Lifetime Trust?

The creation of a Trust and the placement of assets into it creates a separation of those assets from your estate. Your estate comprises all of your assets, including your home, your bank accounts and all of your investments. Placing assets into Trust can therefore be a useful tax planning tool, provided it is used appropriately.

Trusts can be set up for many reasons, including but not limited to the following:-

1. To mitigate IHT by reducing the value of your estate;
2. For the benefit and protection of beneficiaries who may be vulnerable, financially inept or at risk of financial or matrimonial proceedings; and
3. To benefit and protect the interests of disabled persons. You’ll find more information on this in our blog Using Trusts for Disabled Beneficiaries.

When is a Trust not appropriate?

Probate delays have caused a rising number of individuals to consider the use of lifetime Trusts. This is because assets which are held in Trust do not require a Grant of Probate to be dealt with. However, it is important to note that Probate may still be required for several reasons, (including ownership of shares and at the request of banking providers) and so placing your property into Trust does not always therefore avoid the need for Probate.

Care fees are another motivator for placing assets into Trust. However, gifts of property into Trust can be reviewed by a care home and set aside if they deem that the purpose behind the Trust was to deprive your estate of assets to pay for your care. This is particularly relevant if the size of your estate reduces significantly, which subsequently then affects your ability to settle those care fees. 

Tax & TRS

The IHT advantages of lifetime Trusts have been significantly curtailed since 2006, and most lifetime Trusts created post-2006 are now subject to a new more scrupulous tax regime. The Trust Registration Service (TRS) was created by the HMRC in 2017 to improve the transparency around the ownership of assets held in trusts.

The upshot of the above is that trusts are complex, and you should seek appropriate professional advice before incorporating any Trusts into your tax planning. In particular, you’ll need legal support to establish whether the assets held in Trust need to be registered under the new scheme.

When it comes to the TRS, there are ongoing reporting responsibilities for Trustees, particularly for Trusts which attract any liability to IHT.

If you would like to speak to one of our team to discuss creating or reviewing a Trust, tax advice surrounding Trusts or anything else covered in this article, please contact the Wills Trust and Pobate team on 0161 930 5151 or email us at willsteam@gorvins.com, or fill in the online form.