Tim Bennett explains the basics of trusts and how they can help with intergenerational wealth planning.

How trusts can help to protect your family assets

Trusts can be a useful way to protect assets whilst arranging for them to be passed on between generations within a family in a tax-efficient manner. For parents and/or grandparents who have either exhausted their Junior ISA and Junior SIPP options, or who need a different sort of planning solution that may benefit multiple family members, trusts can be useful. However, they can quickly also get complicated and setting them up correctly is vital if they are to be fully effective. So if, having read this short summary, you would like to know more, please contact an Investment Manager who can talk you through our specialist Tax and Trustee Services.

Basic principles

Trusts are one of the oldest forms of legal arrangement. The basic structure is straightforward and involves three parties as follows;

The assets passed into trust by the settlor can be almost anything, from property to investments or art and antiques. There is nothing to stop the “settlor” – who might be a parent – then becoming one of the “trustees” who will manage the property within the trust according to the Trust Deed. The idea is that these assets are held in trust and protected for the ultimate benefit of a “beneficiary”, say a child or grandchild.

Why set one up?

There are many situations where trusts can be helpful – here are just a few examples;

  • Where funds are earmarked for a beneficiary that may not have full legal capacity through age and/or disability
  • Where a parents wants to earmark and protect assets for the benefit of a child beyond the age of 18
  • Where someone remarries and wants to prioritise their own children on death in a will
  • Where the benefit of an asset is to be split so that, for example, a spouse receives income from it during their lifetime but children are the ultimate beneficiaries

Trust types

There are two basic types, depending on whether the aim is to benefit a specified beneficiary or flexible and/or multiple beneficiaries who may have different interests in the trust property.

Basic tax considerations

Here is an outline of one scenario that could involve a trust and help to reduce tax on the settlor;

Two grandparents with surplus capital might want to pass it on by helping a two-year old grandchild with their university education in 16 years’ time

A possible solution could be a bare trust, the key features of which are;

  • The grandparents  could transfer assets into a bare trust
  • The amount settled into trust may fall outside of the grandparents’ estate for IHT purposes, reducing the tax bill on their death
  • Any income or capital gains arising from the trust assets are taxed at the child’s marginal tax rates once that child’s tax allowances have been used up
  • The grandchild will become entitled to the funds within the trust aged 18
  • Capital can be advanced earlier by the trustees for specified purposes such as to cover healthcare costs or maintenance

Key decisions

Setting up trusts properly requires a couple of key decisions;

  • Who will benefit and when? The right trust structure needs to be chosen and the trust deed then executed properly
  • Who will act as trustee? It is important to appoint people who understand the responsibilities that come with the position and are of an appropriate age – a professional may be used as sole, or joint, trustee

Once the trust is established it should be regularly reviewed to ensure that the original trust deed (e.g. where included in a will) is still appropriate.