I have just inherited a lump sum and want to know if it makes sense for me to use a trust to mitigate inheritance tax?
There are many benefits to be secured by placing assets under a valid trust. The most obvious reasons are as follows:
– There is no need to obtain probate before the trust benefits can be paid to the beneficiaries. Upon your death, probate needs to be obtained. The Probate Service will liaise with HM Revenue & Customs so the Capital Taxes
Office can calculate the amount of inheritance tax due (if any). Until probate is granted, your estate cannot be passed to your beneficiaries. Obtaining probate takes time and if you die before making a will, it can take even longer. The good news is that if assets are held under trust, the trustees do not have to wait for probate to distribute your estate.
– A level of control and flexibility over where your estate is distributed on your death. A trust means your estate goes to the people you intended. For example, if you owed money when you died, a trust could mean your estate would go to your loved ones not your creditors.
– A level of protection in the event of bankruptcy. A simple trust for the benefit of your spouse and or children normally offers full protection
against bankruptcy. A claim can usually made only against the investment made or premiums paid and not the value of the product.
– Inheritance mitigation benefits. If your life insurance or investments are not held under trust, the value of the products automatically become part of your estate, which will increase the chances of inheritance tax being due. Putting assets under trust may mean that inheritance tax can be avoided.
There is no particular wording required to form a trust, the words used must be sufficiently clear to show the intention to create a trust. A written declaration of trust is normally completed to be a permanent record of the existence of the trust. The wording can appoint named beneficiaries that cannot be changed which is known a fixed or bare trust or set up as a flexible trust where the beneficiaries can be changed
as circumstances change.
There needs to be three parties to a trust, the settlor who creates the trust and initially owns the assets, this will be you. Next are the trustees who look after the trust’s assets and ensure the trust remains legally valid.
As trustees are considered the legal owners of the assets, the settlor is automatically a trustee. I recommend that you appoint more than one
other trustee, for if the trustees predecease the beneficiary, there can be complications. Similarly, don’t appoint too many trustees, say more than five, as this can become an administration complication. Last, there are the beneficiaries – the people who you want to benefit from the assets of the trust.
Placing investments and life insurance under trust can still save your family thousands of pounds in inheritance savings.
I advise you to also make a valid will as, without one, you cannot be sure that your money and property will be passed on according to your wishes. Placing an asset in trust will ensure that that asset passes to your beneficiaries as you wish but what about everything else you own? Writing a will is something an estimated 60 per cent of us never get around to and it is normally not complicated to do so.
Kim North (kim@techandtech. co.uk) is director of Technology & Technical