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How can family trusts help to protect assets? (Part 1)

How can family trusts help to protect assets

When it comes to organising finances, whether for yourself or a parent, the idea of trusts can be both confusing and daunting. Yet trusts can be an important element of future-proofing assets for generations to come. In this article, we look at what trusts are, how they’re used and how to manage them.

Why would a parent set up a trust?

Trusts are mainly to control family assets and make sure sources of wealth and finance are protected. They can be of benefit to anyone, regardless of the level of their assets.

People set up trusts so they can dictate how their money is going to be spent. Often this is for education, charity and other expenses. Trusts are private – your parent can leave money and assets without sharing the information.

Trusts are also useful in helping to protect family assets in the event of a relationship breakdown or business failure.

Additionally, people set up trusts if they think they might need help managing their affairs. Preparing for the possibility of disability and end of life is something no one likes to face, but as a parent many people feel safe in the knowledge that their finances and possessions will be properly taken care of when they are no longer able.

One of the benefits of trusts is to soften the effects of inheritance tax. Inheritance tax is payable by all people whose estate is more than £325,000 (£650,000 for couples). With house prices rising all over the country, many people will find their property attracting this tax.

Anyone can gift small amounts of money to loved ones without incurring inheritance tax – and trusts are a good way of doing this. If your parent sets up a trust they will have complete control of the trust while they’re still alive – and they can specify how the money will be used if they choose.

While asset protection and inheritance tax issues remain the most popular reasons for setting up a trust, another benefit is to achieve flexible distribution of assets. Trusts can dictate in detail exactly how someone’s assets and wealth is dispensed to beneficiaries, and it also gives the option of dispensing in small amounts as opposed to one big lump sum. Importantly they can also be set up to provide the trustees with flexibility as to how assets are distributed, enabling them to make the best decisions long after the person who put the assets in to the trust has passed away.

How a trust works

Trusts are legally binding arrangements that appoint trustees to look after and preserve assets. Those assets could be:

  • Land
  • Money
  • Buildings
  • Shares and bonds
  • Valuable possessions
  • Heirlooms and antiques

The people these assets are held for are called the “beneficiaries”. Quite often, there is not just one beneficiary, and it is possible to spread assets across a number of people – often family members.

What sorts of trusts would be appropriate?

Personal circumstances largely dictate how trusts are used and what kind of trust your parent might set up. All types of trust hold assets in different ways, and it’s wise to obtain comprehensive advice before they embark on keeping their assets secure.

A family discretionary trust, for example, would work well for someone who is married and wants to safeguard assets – appointing children as beneficiaries and ensuring their estate is passed on to the next generation. Trustees are appointed who are required to look after and preserve the assets that are put into the trust. In this kind of trust the beneficiaries will receive assets at the discretion of the trustees. Parents quite often set these up when their children are young and assets are kept in the trust for future years. They can be useful in safe guarding assets against business failure and to an extent against claims arising from relationship breakdown.

A will trust is a useful way of protecting assets if a loved one dies. For example they can be useful to protect assets for children of a first marriage when a second marriage is likely. They can also be used to split ownership of the family home – essentially to 50% each if a spouse dies. They offer the beneficiary the right to stay in the family home and keep all assets safe. It is up to the trustees’ to make sure inheritance tax is paid on any further transfers into or out of the trust.

A charitable trust is a set of assets held in a trust for the benefit of a specific charity. Often, charitable trusts are used to set up the protection of assets for a cause close to the heart, and they often require a significant initial investment to enable on-going capital growth. They are also often used to raise money for a very specific cause, and differ from donations to existing charities which many people write into their wills.

Things to think about

One issue with setting up a trust is that it can be complicated. Some of the steps you have to take and the terminology used will need to be explained by a legal professional, but some other things you should bear in mind too. For example, you will need to think about who will be beneficiaries and the sort of terms and arrangements under which you wish the assets to be used or distributed over time.

If you appoint a professional to not only set up a trust but also manage and look after it, regular contact with them should ensure you stay ahead of any legal or tax changes and be notified of things to think about with regards to the trust.

Setting up a trust

With the right advice and guidance, trusts need not be as difficult to understand as they first appear. Choosing the right professional to facilitate trusts to your requirement is important. You can use solicitors but also consider approaching financial and investments advisers if the trust is just going to be of an insurance product.

The cost of setting up a trust is varied and it depends on the legal advice sought and the solicitor you use. These fees are likely to be your biggest outlay in terms of initial costs, but there will also be some on-going and management fees for preparing reports and trust tax returns. Because trusts can have a life span of up to 125 years and because they will be the structure safe guarding the assets in them it is important to get the right sort of trust and the right advice. Advice from a trust specialist is money well spent and a tiny fraction of what it usually costs to sort things out if the trust goes wrong. Look out for individuals who are members of the Society of Trust and Estate Practitioners.

If you are setting up a basic trust under your name, the cost might be fairly small.

Wills and trusts

Trusts are frequently created in Wills, and define what assets be handed to beneficiaries upon death, and when. Often, they’re set up to guarantee that the benefits of your estate get passed on to children or close relatives rather than your spouse’s new husband or wife, for example. They also complement each other when trustees are considering the possibility of mitigating inheritance tax.

One popular way of integrating trusts into a will is to stipulate when your beneficiary will obtain the assets in the trust itself. For example – to give a grandchild that survived the deceased a certain property once they reach a particular age.

This article was created with expert help from Burt Brill & Carden Solicitors. Find out more at www.bbc-law.co.uk.

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