Stephen Hamp discusses the pros and cons of using different trusts
Do you feel the general public is now more aware of the need to make inheritance tax provisions? If so, what are the key factors driving this increased awareness?
Consumers are undoubtedly more aware of inheritance tax and the detrimental impact it can have on a family's estate; perhaps more so today than ever before. The main driver of this awareness has been the seemingly relentless rise in the value of residential property.
Of course, these rises have abated somewhat recently. However, while reducing asset values may make inheritance tax planning seem less important, it must be remembered that for the vast majority any liability will be payable after death.
This means that professional financial planning is just as important as it has always been to ensure that the minimum tax is paid and the maximum value is left for the family.
Investing in AIM markets allows people to mitigate inheritance tax liability after two years. However, how has investment market volatility affected people's willingness to adopt this approach?
When making any investment, one of the key factors an adviser and client will consider is the inheritance tax effectiveness of the investment structure. However, it should not be the only factor.
As we are in a more challenging economic climate, the investor's desire for security and risk reduction may take precedence over inheritance tax planning. For instance, the Standard Deviation figure (a measure of risk and volatility) for the 12 months to 31 January 2009 was 10.71 for the FTSE AIM All Share TR while the FTSE All Share TR was just 6.21 over the same period. (Source: Morningstar.)
This higher level of risk and volatility associated with AIM investments will inevitably reduce the demand for this type of investment, despite its IHT effectiveness.
What are the pros and cons of different trust structures?
Any trust allows the settlor/donor to make a gift while retaining some control over and, in some cases, access to the asset given. That means that the pros and cons of each trust are also going to be driven by the access and control that the donor is looking for.
A discounted gift trust, for example, may well meet the needs of a donor seeking a regular income, but is unlikely to be the most appropriate solution for a donor who may need quick access to their capital.
Speaking more generally, a discretionary trust provides the greatest flexibility over the choice of beneficiary in the future, whereas a bare or absolute trust provides the greatest certainty for IHT planning.
If the settlor/donor needs access to capital or income in the future then a loan trust or a discounted gift trust will be worth looking at.
In terms of inheritance tax mitigation, a bare trust is a 'potentially exempt transfer' meaning that regardless of the size of the gift; it will all be outside of the settlor/donor's estate after seven years.
Discretionary trusts are 'chargeable lifetime transfers' and may incur a charge to inheritance tax if the gift is greater than the nil rate band (currently £312,000). There is also the potential for periodic charges (every ten years from the date of the gift) as well as an exit charge.
What factors do advisers need to bear in mind when choosing a trust structure for clients?
The key factors can be categorised into the following three areas:
1) Flexibility over choice of beneficiary;
2) Access by the settlor/donor to capital and/or income
3) The urgency of reducing the value of the taxable estate
It is important for the financial adviser to consider each of these areas and not simply one or another in isolation. For example, the extent to which the settlor requires flexibility over the choice of beneficiary will be important, but if the settlor does require this flexibility and is considering a discretionary trust, then this will result in the need for additional inheritance tax consideration.
How easy is it to amend a trust once it is made? What options are available to advisers should changes need to be made?
Amending trust terms once the trust has been executed is not an easy matter.
If a change of beneficiary is likely, anticipated, or even possible then it's important that a discretionary trust structure is chosen. This type of trust structure permits the trustees to change the beneficiaries and allocate benefits where they deem them most appropriate.
What are the common mistakes people make when dealing with tax and trusts? How can these mistakes be avoided?
It is important to remember that a trust is a means of making a gift, or disposal, on terms that can reflect the needs of the settlor/donor in respect of control, flexibility and access to the assets given.
In selecting the most appropriate trust structure there is no replacement for detailed and thorough fact-finding. The combination of qualified and experienced financial advice with an innovative range of financial products and trusts can combine to deliver a range of estate planning solutions for a wide range of clients.
Stephen Hamp is the head of the technical and training division at Hartford Life.
Having started his financial services career in 1993, Stephen has built his career across a number of fields such as pensions technical advice, actuarial and accounting, marketing, and from 2000 to 2007 in sales management, where Stephen was a regional sales director with national advisory firm Millfield.
Stephen joined The Hartford in 2007 as technical manager and is responsible for the team that provides The Hartford's internal and external technical information and support.
About The Hartford
The Hartford is one of the largest financial services companies in the US, with international operations located in the United Kingdom, Ireland, Japan, Canada and Brazil. Established in 1810, The Hartford has over 195 years of experience. The Hartford prides itself on a superior level of customer service. In 2008, it claimed the top spot for the five star Life & Pension category at the Financial Adviser Service Awards.
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