Simply, it is a legal document whereby one or more persons (called 'the trustees') hold assets on behalf of or for the benefit of another person(s) (called 'the beneficiaries').
The trust is created for the benefit of the beneficiaries but is administered by the trustees.
Trusts give you the opportunity to give up ownership whilst ensuring that the assets are utilised for the benefit of your beneficiaries as you may wish.
Trusts take many forms, can be extremely flexible and may mitigate Capital Gains Tax (CGT) and Inheritance Tax (IHT).
Discretionary Trusts - This is the most common type of trust, especially after changes to inheritance tax introduced by the Government. With this type of trust both income and capital may be paid to one or more of a class of beneficiaries at the discretion of the trustees. A discretionary trust may be more suitable if you are uncertain as to whom you would like to benefit from the trust and you would prefer to benefit a number of different persons at different times.
There are IHT charges on creation, at 10-year intervals and upon exit, but at a fraction of the normal inheritance tax rate, and depending on the nature of the trust property may be exempt from IHT altogether. There are also CGT advantages. Income taxes are less straightforward.
They can also be very useful if a beneficiary has special needs.
Will Trusts - Wills can be an excellent vehicle for creating trusts (for more discussion of Ws see the Wills section of this website). The FA2006 changes to IHT created two new kinds of trust that are only available in Ws, and only by a parent for his or her children.
Bereaved Minor Trust (BMT) - The BMT is a W trust by a parent for his or her children with capital vesting by the 18th birthday. This trust carries no additional IHT burdens over the flat 40% charge on assets above the nil rate band (£285,000 for 2006-2007), so no entry, 10-year or exit fees.
71D (18-25) Trust - The 71D Trust is a variation of the BMT that provides an extended trust period up to age 25. The 71D trust also avoids the charge on creation and 10-year charges, but is subject to a modified exit charge based on the period from age 18 to exit up to age 25. Anything beyond that is a relevant property trust subject to the regular charging scheme.
Accumulation and Maintenance Trust (A&M) - Once a mainstay of estate planning, especially among grandparents seeking to provide for their grandchildren, A&M trusts were stripped of their inheritance tax benefits by the Government as part of FA2006. From 22 March 2006 no new A&M can be established in excess of the available nil rate band. Those in existence on that date have until 6 April 2008 to be modified to be consistent with the new rules. Of course, the distribution goals of an A&M can still be accomplished by a relevant property trust, albeit with the schedule of IHT charges.
Interest In Possession Trusts - Like A&M Trusts, new IIP trusts no longer offer the IHT benefits they used to. Under FA2006 IIP trusts established after 22 March 2006 are necessarily relevant property trusts, subject to the relevant property charging scheme-but with two exceptions. The first is for IIPs, or life interests, created by W that give rise to the interest immediately. This is known as the Immediate Post Death Interest (IPDI). The second exception is for IIP trusts that were established from an IIP settlement that was in existence on 22 March 2006 and was changed before 6 April 2008. This Transitional Serial Interest (TSI) can effectively defer IHT charges for a generation by replacing a current IIP beneficiary with his or her children, but the availability of the TSI is largely dependant on the flexibility of the underlying trust. Current IIPs already in existence as at 22 March 2006, if unchanged, W be subject to IHT upon the death of the life tenant (the values aggregated into his or her estate).
Please note professional advice should always be sought as to the tax advantages and disadvantages for your particular needs and circumstances prior to creating a trust.
If you wish to create a legacy for the benefit of your children or your grandchildren or you wish to mitigate your estate's inheritance tax bill Trusts may be an excellent vehicle for accomplishing your goals. Trusts can also be useful if you are concerned about the possible impact of divorce and bankruptcy.
Please David Edwards for further information or to arrange an initial interview.
This contains general information. You should not act or omit to act without legal advice from us specific to your circumstances.
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