A trust lets them do this, which is one of the reasons why trusts are such a useful estate planning tool.
How can trusts offer protection?
Trusts offer a means of protecting assets for the beneficiary. If a client makes an outright gift to a beneficiary, who then divorces or goes bankrupt, the money could be lost.
However, if it is a discretionary trust, the trustees can choose when to, or whether or not they should, pass on a gift to a potential beneficiary. That means the assets in question are protected further.
How can trusts save IHT?
Trusts are a useful way to save IHT without having to make an outright gift to another person.
For example, if the client places assets into a trust that they can not benefit from, after seven years the assets will fall outside their estate for IHT purposes. And any growth on the assets over that time will immediately be outside their estate.
There are also different IHT planning trusts that allow clients to take an income while reducing their potential IHT.
How can trusts avoid probate delays?
After someone dies, IHT and probate fees must be paid before probate is granted and assets can be distributed in line with the will. However, the executors of a will cannot access the estate’s assets until probate is granted. Catch 22. They must find the money from elsewhere.
As a trust is separate from your estate, trustees can immediately access any money held in it without waiting for probate. The money can then be used to pay the IHT bill and probate fees.
Another way to do this is to set up a life insurance policy that pays a lump sum into a trust when a client dies. This money will remain outside their estate and so will be available to pay the IHT bill.
Is it possible to make changes to a trust?
The trustee can change the terms of the trust if:
- There’s a clause allowing this in the trust deed; or
- All the beneficiaries give their express consent to do so.
Otherwise, the trustee can go to the court to seek a change to the conditions of the trust.
What are some of the different types of trust?
Absolute or bare trusts
Under an absolute or bare trust, the trustees are the legal owners of the assets, but the beneficiaries are absolutely entitled to them.
This means that the beneficiaries can demand their share of the trust’s assets when they reach age 18, or 16 in Scotland.
Once this type of trust has been set up, the beneficiaries cannot be changed or removed.
Interest in possession/life interest trusts (life rent trusts in Scotland)
Under an interest in possession trust, at least one beneficiary has the right to any income from the trust.
A life interest trust gives beneficiaries the right to occupy a property or receive an income from it. The beneficiary may also be known as the life tenant, or life renter in Scotland.
