Maximising wealth transfer and protection through trusts – Vanessa Clark of Azets
29th November 2023
A trust is a potent tool for wealth transfer and asset safeguarding. When strategically utilised, trusts enable the efficient transfer of assets to future generations with minimised tax obligations, making them a cornerstone of prudent future planning.
A trust establishes a separation between legal and beneficial ownership. This can occur explicitly through a formal deed or even inadvertently, such as when a grandparent opens a bank account for their grandchildren, holding the funds for their benefit.
The individual initiating the trust is the 'settlor', transferring assets to trustees responsible for managing them in the best interest of the beneficiaries. These beneficiaries are entitled to income and/ or capital from the trust, as outlined in its terms.
Advantages of trusts
Utilising a trust structure offers several advantages. It allows for the deferral of capital gains tax via hold over relief for non-business assets. Furthermore, it can result in potential inheritance tax savings, especially when used for asset protection.
Trusts are particularly valuable when the intended beneficiary is young or vulnerable, providing a protective mechanism superior to outright gifts. Additionally, they ensure the orderly succession of assets, safeguarding against relationship breakdowns or remarriages, where the settlor wants to secure assets for specific beneficiaries, such as children from different marriages.
Lifetime trusts and tax implications
Post-March 2006, most lifetime trusts fall under the "relevant property trusts," subject to a specific inheritance tax regime. While these trusts face a potential 6% charge every 10 years, this charge rarely reaches its maximum, making the overall inheritance tax significantly lower compared to direct transfers.
Individuals can gift up to the current nil rate band (£325,000) into a lifetime trust every seven years without incurring immediate inheritance tax. Married couples can potentially contribute up to £650,000 collectively, albeit subject to the seven-year inheritance tax clock for larger transfers, attracting a 20% lifetime inheritance tax charge.
Trusts in will planning
Will planning involving trusts offers flexibility by empowering trustees to allocate trust assets based on beneficiary circumstances and evolving tax laws post-death. A discretionary will trust allows adjustments between will preparation and the date of death.
A clear 'letter of wishes' guides trustees on asset distribution but isn't binding. Trustee selection is crucial, necessitating trustworthiness, understanding of family dynamics and tax implications.
Support and guidance
In summary, trusts serve as a powerful mechanism for wealth transfer, asset protection and tax efficiency. When appropriately structured and managed, they form a robust cornerstone in securing financial legacies for future generations.
If you have any questions regarding trusts or are planning to use trusts, please get in touch with your local Azets advisor at https://www.azets.co.uk/gloucester-and-cheltenham or speak with a member of our Private Client services team on 01452 335800.
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