Trust Planning – it’s critical
Trust Planning – What is a Trust?
Quite simply, a Trust is a box that you can place your assets into, in order to protect your estate or your intended beneficiaries, from the threats of probate costs, sideways disinheritance, divorce or bankruptcy of your beneficiaries, remarriage or inheritance tax.
Trust planning is a very specialised area of law and we have a team of professionals that are experts in this field. Be very careful to ensure that this is dealt with by specialists. This is a significant area within Portcullis Legals and one of our main areas of expertise.
A Trust has the ability to:
- Prevent your direct bloodline (children and grandchildren) losing out in the event of your dying and your surviving partner remarrying. If you simply leave your estate to your partner and they remarry and subsequently die, it is common for the estate your partner inherited from you to pass to the family of the new partner. A Trust can stop this.
- Prevent an inheritance left to a child who is facing problems (divorce, bankruptcy) can be distributed to that child in such a way that it won’t be squandered or misused.
- Prevent the situation arising whereby a child with disabilities could lose benefits if they inherit from you through a Will. Inheriting via a Trust means that benefits are not affected.
- Any assets that are held in a Trust can be distributed immediately – thereby removing the need, and the huge cost and time delays, of probate.
Trusts are far more than just a potentially tax efficient way of protecting and gifting assets for the next generation. They provide welcome protection for young children or vulnerable beneficiaries. We can help you set up and manage effective trust planning, providing you with peace of mind.
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What are Trusts and how do they work?
A Trust is an arrangement where property is held by one party for the benefit of the other party/parties. Once assets are put into the Trust they belong to the Trust not the person intended to benefit. He or she may get gifts or even payments from the Trust but they cannot be said to have any assets themselves. Trusts hold and invest assets. This can include the family home. It may provide a means of managing and maintaining a property. This is particularly useful when the person lacks legal capacity i.e. sufficient understanding to enter into a contract. Trusts are normally set up as part of drawing up a Will. There are different types of Trusts.
What is an Accumulation & Maintenance Trust
If you have young children (under 18) who you wish to provide for in the event that you (and your partner, if you have one) pass away, then we will include in your Will(s) an Accumulation & Maintenance Trust. The Trustees appointed by you can then provide your nominated children’s Guardian(s) with sufficient funds to care for your children until they reach 18 when they will inherit. You may choose a later age at which they should inherit although, from April 2006, if your child is not disabled there may be additional taxes to pay on the trust fund, subject to the amount held in the trust fund.
What’s the best way to provide for my disabled child? (Discretionary Trust)
Although not exclusively, a Discretionary Trust is often used by families who have a relative with a learning disability. Discretionary trusts are a way of putting in place financial arrangements to help support that relative. A Discretionary Trust can also provide a way of owning property. Sometimes families decide that in the long-term they would like to be able to set up arrangements that allow their relative to continue to live at home with the necessary support. This is known as a life interest. In summary, Discretionary Trusts are used: As a way of paying for the things the statutory services may not be able to give, for example a holiday, a new coat or even additional care. As a means of owning, managing and maintaining a property. As a way of arranging an inheritance. So there is a way of managing money or other assets. To avoid benefits and care funding being stopped. Income Support – and possibly other benefits such as Housing Benefit – stops being paid if a person has more than a certain amount of money. Benefits are withdrawn or reduced until savings fall below the relevant level for the benefit. If Social Services fund a residential care place or care package they may also begin to charge for the care service or stop funding it. A Discretionary Trust can avoid this.
What are the key points about a Discretionary Trust
Trustees have discretion as to how the assets are used – the trustees are free to make all the decisions. The person to benefit from the Trust must not have a right to the income or capital. The intended beneficiary must not be the only person named in the Trust i.e. must not be the ‘sole’ beneficiary. Without these features the Discretionary Trust is not properly constituted and the person may be treated as though they own the house or have the money. If you want to make some financial provision for a close relative who is dependent on welfare benefits and/or supported by Social Services do not say in your Will, “I hereby leave my worldly goods to x”. This will not provide a long-term nest egg. Consider instead including in your Will a Discretionary Trust – ask your Portcullis Will Specialist for further details.
How can I avoid the council selling my home if I’m taken into care? (Protective Property Trust)
It is illegal to deliberately transfer your own property to relatives or trusts if your prime motive is to avoid paying long-term care costs. However, it is not illegal for you and your partner to each make a provision in a Will, that upon the first death, the deceased’s half-share of the family assets and/or home, is placed in trust for their children or other beneficiaries, instead of passing direct to the surviving partner. The Protective Property Trust Will has been specially designed for this purpose. It keeps the assets and/or share of the home owned by the deceased partner away from the council’s reach while at the same time allowing the surviving partner to continue benefiting from the assets and/or share of the home within the trust. On their death the assets and/or share of the home owned by the trust together with whatever is left of the assets of the second partner can be given to the surviving family.
What about Inheritance Tax?
If the value of your Estate after payment of your debts and any gifts to your husband or wife or to charity is worth more than £325,000 (2015/16 tax year), then Inheritance Tax will be payable at 40% on the value over this amount. However, if when you die you are a widow/widower or bereaved civil partner your allowance is £650,000. The information provided is of a general nature. if you wish to receive individual advice then we suggest you seek the advice of an independent financial adviser. Portcullis will be happy to refer you to one if you wish.
What is a gift made “free of tax”?
A gift is free of tax when any Inheritance Tax, if it is payable, is to be paid out of your Residuary Estate and not to be deducted from the gift itself. When instructing Portcullis to draft your Will you can specify which gifts, if any, you would like to be subject to tax. All gifts to charities are by law totally exempt of Inheritance Tax.
What does it mean if I give someone a “life interest” in my Estate?
If your responsibilities are “divided”, e.g. you wish to ensure that your partner is adequately provided for but feel you have a duty towards, say, children from an earlier marriage, then you may wish to consider giving your partner a “life interest” in your Estate. This restricts the partner’s inheritance to the income (interest earned) on your capital or specified sum. If you own your home outright or own a share as tenants-in-common then you may also wish to give your partner the right to live in your home rent free until they die, remarry or for only, say, a specified period. Once they die or after the specified event has taken place then your home and/or the capital sum will pass to whoever you have specified in your Will, such as your children. You should, however, bear in mind that unless your Estate is fairly large, the income from it may be insufficient to support your partner. A gift of a life interest also causes the duties of the Executors and Trustees to be more onerous. When considering a gift of a life interest, it is very important to remember that the recipient does not own the property or capital sum and therefore cannot dispose of it in his or her own Will. It is also important to remember that the prime duty of your appointed Trustees is to keep a fair balance between income for the person getting a life interest and capital growth for those who will be ultimately entitled to your Residuary Estate.
What are trustees?
Trustees are the people appointed to look after your assets in the trust for the benefit of the beneficiaries, for example until a child is old enough to inherit. Usually Executors and Trustees are the same people. Trustees can be other family members, friends or professionals.
What happens to property in joint names?
People who co-own a property hold it either as “joint-tenants” or as “tenants-in-common”. Husbands and wives are usually, but not always, joint-tenants. This means that when one of them dies the other one automatically becomes the owner of the whole of the property. If you own property as a joint tenant, you cannot gift your share of the property in your Will. Partners who have been married before often prefer to own the property as tenants-in-common. This means that when one of them dies his or her interest in the property forms part of his or her Estate. They can separately make a gift in their Will of their share of the property, perhaps to their own children from a previous marriage. If you own your property as joint tenants, but would like to own it as tenants in common, Portcullis can arrange this for you and arrange the relevant changes to your deeds. If you don’t know whether you are joint-tenants or tenants-in-common, you can also instruct us to find out for you. These principles also apply to other jointly owned assets such as bank and building society accounts and other investments.
As a married couple (or civil partnership), what happens if one partner dies prematurely and the survivor remarries?
This is the most common question we are asked by customers of all ages! In short, if you have left everything to your partner in a Will or you jointly own the house or any other asset with them, the survivor receives what you leave them in a Will or the asset you jointly owned with them. However what if you want to ensure your children from this relationship or indeed a previous relationship inherit your share of the house for example? If you have left it to your surviving partner and they then meet a new partner, how can you guarantee that your children will get your share? This is why you need to be talking to us about trusts planning.