Following the 6th Duke of Westminster’s death last month, there was a media outcry about the lack of inheritance tax (IHT) his estate will be paying. Without the use of trusts, exemptions and reliefs his £8.3 billion estate would have been subject to a £3 billion inheritance tax (IHT) bill.
The exact details are yet to be established, but it is likely that the parts of his estate that did not benefit from the spousal exemption (news outlets seem to have neglected to mention that any sum passing to a spouse is exempt from IHT) were placed into trusts during his lifetime or benefited from agricultural property relief and business property relief.
Trusts, however, aren’t just a method of avoiding tax. There are many other benefits which often get glossed over in the mainstream press:
- Trusts enable property to be given to minors
Children under 18 are not able to own property outright therefore often parents will purchase property to hold on behalf of their children. These are usually bare trusts.
- They can protect a third party investment in a property
Parents commonly lend money to children to enable them to purchase property. To protect the investment, it is often the case that a declaration of trust is executed to show the underlying ownership.
- They protect vulnerable beneficiaries
Trusts for vulnerable beneficiaries fall under a favourable tax regime. Frequently, they are created to avoid affecting a disabled beneficiary’s benefits.
- Trusts can shelter money from means-tested benefits
Where someone has been awarded damages or compensation for any personal injury, a trust is usually the best way for the injured party to take the sum without affecting means-tested benefits.
- Life insurance policies can be written into trust
Policies are frequently written in to trust so that the monies paid out do not vest with the beneficiaries immediately or form part of the deceased’s estate.
- Trusts can protect beneficiaries from others and themselves
Discretionary trusts (whether incorporated in wills or created during a settlor’s lifetime) are a good way to protect beneficiaries from themselves (if they are impecunious), creditors (if they are on the verge of bankruptcy) or ex-spouses (if they are divorcing).
The creation, administration and taxation of trusts are complex areas of law. Therefore it is always best to seek professional advice before creating a trust.
Please contact our private client team if you have an queries on estate planning.