When the life tenant dies the trust assets can be passed to other beneficiaries.
Discretionary trusts
Discretionary trusts give the trustees discretion over which beneficiary receives the money in the trust and when they receive it.
Discretionary trusts provide the greatest flexibility and are sometimes accompanied by a letter of wishes from the settlor to provide non-binding guidance to the trustees.
Loan trusts
A loan trust lets a settlor keep access to their money while giving away any growth. When a loan trust is set up, the settlor lends money to the trustees who invest it.
The settlor can request repayment of all or part of the loan at any time. For this reason, the loaned money remains in the settlor’s estate for IHT purposes.
However, any growth will immediately be outside their estate and held in trust for the beneficiaries.
Discounted gift trusts
A discounted gift trust gives the settlor the option to pay money into the trust and then take a series of fixed withdrawals from it over the rest of their life.
The amount of money originally transferred into the trust is discounted for IHT purposes and there is an immediate reduction in IHT. After seven years, it all falls outside the settlor’s estate.
Any growth on the investment is immediately outside the settlor’s estate.
Discretionary will trusts
A discretionary will trust is written into the settlor’s will and commences when they die. They usually have a wide range of beneficiaries and give the trustees discretion over which beneficiary benefits, and when.
In other words, the trustees keep control over the assets held in the trust.
Before the nil-rate band for IHT became transferable between spouses, discretionary will trusts were used to ensure that the nil-rate band was used up when the first spouse died.
Life interest will trusts
A life interest will trust also commences when the settlor dies. It gives one beneficiary the right to occupy a property or take an income (life interest) from a trust, with the assets passing to others after the death of the life interest beneficiary.
These are commonly set up when someone marries for the second time but has children from a first marriage. The spouse could continue to live in the family home or receive an income for life, but the ultimate destination of the house or money could be the children from the first marriage.
As this article clearly shows, trusts can be very complicated structures and often have complex tax implications as well as additional obligations for trustees, for example registering on the Trust Registration Service.
However, they are also an essential part of the adviser toolkit that can make a real difference to your clients and their loved ones.
