The Advantages of Trusts

Article excerpt

repare to be baffled.

PHM Revenue & Customs describes a trust as "a disposition of property to a person (trustee) or persons jointly (trustees) in whom the legal title then vests in the confidence that the benefits will be applied to the advantage of one or more other persons (beneficiaries) or some other object permitted by law".

This may appear bemusing but hardly does justice to some of the complexities involved in trusts. However, the use of trusts is becoming more and more widespread as people begin to see the benefits of using trusts, especially for estate and inheritance tax planning.

A trust is a legal instrument which has its roots in Middle Ages. When knights about to join the Crusades in the Middle East would transfer their possessions and land to the safekeeping of a trustee while they were away. The trustee would be given legal title to the knight's land and possession and have carte blanche to manage them in his absence, provided that any decisions they took were for the knight's (the settlor in legal parlance) benefit rather than their own.

It soon became apparent that trusts had certain advantages in terms of taxation.

How can the settlor be liable to tax on the property if he no longer owns it? Trusts became the standard tool for the landed aristocracy to maintain control over their estates and avoid death duties. They also became the battleground between tax inspectors and trust lawyers to gain the upper hand, a battle which still continues. In modern times, the range and use of trusts have become more sophisticated but the principle remains the same. Trustees are now commonly companies set up specifically for the purpose of running trusts and the beneficiary of a trust can be anybody the settlor chooses, very often family members or charities.

The trustee will be the legal owner of any assets transferred to the trust and must look after those assets according to the terms of the trust deed drawn up at the outset as determined by the settlor or a deceased settlor's will.

A very common use for trusts is to ensure that children who are left or given large sums of money do not have full access to it before they are mature enough to use it wisely. Trusts can also be set up to ensure that the donor retains more say in how their assets can be used after their death or to prevent a family business from becoming fragmented if its legal ownership is split between too many beneficiaries. Almost any type of assets - property, bank deposits or shares - can be held in a trust.

Trusts can also be used for tax planning purposes, for asset protection (by distancing assets from their owner in the event of divorce or company failure) and for those seeking some privacy for their families when they die. The contents of a will are on public record, but the contents of a trust are not.

A discretionary will trust was an essential piece of inheritance tax planning for any couple with assets values over the nil-rate inheritance tax band. By ensuring that each spouse used their IHT-free allowance, thousands of pounds of tax on their estate could be avoided. …