Myth or fact? The truth about trusts

While trusts are frequently used to minimise Inheritance Tax (IHT) upon death, they are not exclusively beneficial to the wealthy. Rising property prices have unexpectantly exposed more estates to IHT, making trusts a valuable tool for a wider range of families. 

Beyond tax mitigation, trusts serve various purposes, particularly in contemporary blended families. They can offer a structured approach to providing for children from different relationships. For instance, a life interest trust is a popular tool for enabling a surviving spouse from a second marriage to live in the family home and benefit from the deceased’s estate income during their lifetime, while preserving the underlying capital for children from the first marriage.

Trusts may also be suitable in other unique circumstances.

• Discretionary Trust: provides flexibility to benefit a range of potential beneficiaries.  
• Disabled Person’s Trust: provides financial security for a person with disabilities and may offer certain tax advantages.
• Personal Injury Trust: provides some benefit when determining the appropriate entitlement to residential care. 

This is unfounded, as trusts are subject to their own rigorous tax regime. Trusts in fact face the highest rates of Income Tax, Capital Gains Tax, and Stamp Duty and have lower tax-free allowances compared to individuals or companies. Inheritance Tax may also arise upon the creation of a trust, on its ten-year anniversary, and when assets are transferred out of the trust. Despite these tax obligations, trusts remain valuable for safeguarding assets for beneficiaries, often justifying the associated costs.

The creation of trusts can in fact be made at various points:

• During lifetime: assets can be transferred into a trust immediately or with a nominal sum, with a plan to add more funds later.
• In a will: a trust can be created to take effect upon death.
• After death: within two years of death, a beneficiary of the deceased individual’s estate may establish a trust via a Deed of Variation. This approach is often used when the beneficiary does not require the assets or wishes to reduce the IHT liabilities for the estate. 

Contrary to popular belief, flexibility can be built into trusts to allow access to assets. Depending on the type of trust, as the needs of beneficiaries may change over time, the distribution of income or capital is made at the discretion of the trustees, acting in the best interests of the beneficiaries.

The individual creating the trust (the 'settlor') has the power to appoint trustees to manage the trust. If established during the settlor’s lifetime, the settlor can act as a trustee, maintaining some level of control. Trustees may include family members, friends, professionals, or a combination thereof. Professional trustees are often preferred in complex situations, such as where family relationships are fractured. They are also held to a higher standard of care and typically seek to follow the settlor’s wishes.

Choosing reliable and trustworthy trustees who respect the settlor’s wishes is crucial.