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Why are Trusts so useful in estate planning?

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Thursday August 15, 2013 at 10:00am
Last week I talked about some of the personal benefits to writing a trust into your Will. I have continued the theme this week. However, it is important to understand that many of these benefits are available via trusts created in your life-time and not only on death under the Will. Here are some more benefits to leaving assets in trust:

Maintaining control over how children spend their inheritance

There are many parents who are concerned about how their children might spend any inheritance. By writing a trust into the Will the trustees can keep assets safe but also allow access in a controlled manner. A letter of wishes can also guide trustees on how the money should be used. For example, for further education or as a deposit for a house. In this latter case the trust also affords protection on divorce as discussed last week.

Avoid a double charge to Inheritance Tax for unmarried couples

I mentioned last week that each person has a lifetime Inheritance Tax allowance of £325,000. Anything over this amount that you leave on death is taxed at 40%. If you are married you can transfer assets to your spouse (as long as you have a valid Will) and the tax is paid on the value of their estate (including any of your assets that are left) when they die.

However, for unmarried couples there is no inter spouse transfer allowed and neither is there any claim available to transfer the former partners nil rate Inheritance Tax band of £325,000. By each partner leaving assets into trust on death they are able to ensure their nil rate band is fully utilised and also exert some control over what happens to their assets on death.

Protecting children with special needs

If you have children that have special needs, then leaving assets in trust for them can be an effective way of providing for their lifetime needs. This can be done in a way that does not stop any other benefits that may be available from the local authority or the state.

Protection for assets that are likely to increase in value

You may have an asset that you expect to grow substantially in value after your death. By transferring that asset to your spouse on death any future growth in value will then fall into their estate when they die and be taxed at 40%.

By transferring the asset into trust on first death you can help to ensure that any subsequent growth in value remains outside the remaining residual estate and this avoiding the Inheritance Tax on this.

Avoid a cumulative inheritance tax problem

Assets given to children will form part of their estate when they die. Hence, they may have been taxed as part of your estate and taxed again when your beneficiary dies. By leaving your assets in trust your children can benefit from those assets. However, as long as any money taken from the trust is by way of loan there will be no further tax charge when the beneficiary dies. In this way you have avoided Inheritance Tax on wealth passed to grandchildren.

Protect inherited wealth from bankruptcy or divorce of the beneficiary

If you give or leave your wealth directly to your beneficiaries and they subsequently divorce or even become bankrupt, that inherited wealth may well be lost. However, if you have left your wealth to a trust, of which your children are beneficiaries, a court cannot put a charge over assets that do not directly belong to the beneficiaries. In this way you have removed at least some or possibly all of the risk of loss.

As you might have realised I’m really committed to helping my clients maximise their wealth through effective tax and estate planning strategies. You work hard for your money, after all, so why allow it to be eroded by taxes or circumstances beyond your control? If you are concerned that you haven’t put in place an effective estate planning strategy contact me, I’d be happy to explore your options with you.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here