Trusts can play a hugely beneficial role in retirement planning. Phil Carroll demonstrates how good advice can really help advisers add value
Much is written and said about the use of trusts, but the core added benefits are sometimes overlooked. The Finance Act 2006 raised the profile of trusts as the Government radically changed the rules. However, the key benefits remain untouched.
Often financial planning focuses on the price or possible return, but invariably there is much more to it than this. The use of trusts will provide potential tax benefits, but what they can also do is deliver peace of mind and certainty. The role of financial advice here is crucial.
There are various reasons why a trust may be used or recommended, but there are three uses in particular which advisers should be aware of:
- Avoiding probate - a trust can avoid the possible delays involved in administering a person's estate by avoiding the need for probate on assets held in trust when the settlor dies. Whether the client dies with a valid will or intestate (where there is no will or letters of administration), the personal representatives will usually need to acquire a grant of probate to deal with the deceased's estates. In essence the estate's assets are 'frozen' until the personal representatives have paid any inheritance tax due and obtained probate. It is not uncommon for this to take a number of months or even a year - which can put the beneficiaries in difficult financial circumstances if they are relying on the proceeds of the estate to pay bills or inheritance tax. Using a trust can help mitigate this issue, by ensuring the right people receive the assets quickly.
- To make a gift - a trust can hold nearly any asset, so will enable the individual to give the asset away without the beneficiary actually receiving it. For example, this is ideal where the beneficiary is a minor and the settlor does not yet want them to access the assets.
- To reduce an inheritance tax (IHT) liability - IHT is applied to assets which an individual owns on death. Where an individual's assets exceed the nil rate band (£300,000 in tax year 2007/08) they may suffer tax at 40% on any value above this. Creating a trust before death where the settlor is also not a beneficiary may help reduce the liability on the asset in part or full, depending on how long the settlor lives after making the gift.
What is the relationship between a trust and a will?
Wills and trusts are not the same thing. The key point to be aware of is that if someone has a trust, they also will still need to have a will. Without a valid will an individual's estate will be distributed following the intestacy rules, and not necessarily according to the wishes of the individual.
Are there any risks in using a trust?
Yes, there can be risks, and anyone considering a trust should get appropriate legal and financial advice before committing.
For instance, where a gift is made absolutely into a bare or absolute trust for a minor, the beneficiary is immediately entitled to receive the asset on their 18th birthday, which may not be what the client ideally would like. Furthermore, the beneficiary cannot be changed or varied.
As another example, where making gifts to reduce IHT liabilities, the settlor may be excluded from benefiting from the trust, so if they require the gift back in the future, this cannot be achieved. However, some arrangements using trusts have been developed to provide access to either regular lifetime payments or to part or all of the capital and still be effective for IHT planning, such as a loan trust or discounted gift trust. As mentioned earlier, before entering into such an arrangement, advice is critical to ensure any trust restrictions are well understood.
A sobering thought is that it is predicted that by 2008 nearly a billion pounds of insurance policies may be subject to IHT, as a trust has not been 'wrapped' around them. Certainly most single life or joint life last survivor life assurance policies could be placed in a trust and reduce this potential £400m unnecessary tax take. In addition to reducing the tax, the trust would negate the need for probate and ensure prompt payment from the life offices to the trustees. This gives the settlor the peace of mind that the right amount of money will be in the right hands at the right time.
The Finance Act 2006 and the recent Pre-Budget report clearly demonstrate the ongoing need for advice around existing trusts and their application for new clients. Time spent in this area can only reap rewards for both you and your clients.
- Immediately effective
- Trusts provide certainty as they are immediately effective and changes in legislation normally do not affect existing trusts
- No probate
- Trusts are confidential and details not available to the public
- Only effective on death
- Wills are only effective on death which means they can be easily changed, but also will be impacted by any legislation changes
- Probate still needed
- Wills become public on death, not ideal in complex family situations
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