You might have thought that later life planning started and ended with a Will, but have you considered the benefits of trusts? Trusts are powerful legal arrangements that offer a range of advantages for both you and your loved ones.
How Does a Trust Work?
A trust is a legal arrangement allowing you to entrust money, property, or assets to someone else for management, often for the benefit of a third party. Once assets are placed within a trust, they no longer belong to you. Consequently, they're not included in your estate upon your passing, thus bypassing Inheritance Tax (IHT).
When setting up a trust, trustees are appointed to manage the assets within it. They assume legal ownership and wield the authority to buy, sell, or invest. This responsibility includes regular investment reviews and disbursing payments to beneficiaries as per your instructions.
When establishing a trust, you'll designate beneficiaries who stand to benefit in the future. They may receive trust income, such as rent from a property, the capital, or both.
Trusts can be established to come into effect immediately or after your passing, each with its advantages. For instance, placing your home in trust for immediate effect can potentially reduce future care fees as it's no longer considered part of your estate.
Why Use a Trust?
There are numerous reasons to incorporate a trust into your estate plan:
Holding assets for vulnerable beneficiaries: Trusts can safeguard assets for young or vulnerable beneficiaries until they're old enough or meet certain conditions.
Reducing IHT: By placing assets in a trust, you can lower the overall IHT due on your estate, ensuring more assets are passed on to your loved ones.
Mitigating high care fees: Assets held in a trust are exempt from care assessments, potentially protecting them from being used to pay care costs.
Avoiding probate: Trusts enable beneficiaries to inherit immediately, bypassing the lengthy probate process.
Another significant advantage of trusts is the enhanced control they afford over the distribution of assets after your passing. They provide an additional layer of protection, preventing unintentional disinheriting or undesired asset distribution scenarios.
Trusts and Tax Contrary to common belief, trusts aren't entirely tax-exempt. While they can reduce IHT, they're subject to various forms of taxation.
Changes to tax rules in 2007 mean that certain types of trusts are now subject to more taxation. Capital gains tax applies to gains over the annual allowance, and trust income is liable to income tax.
Additionally, some trusts may incur IHT charges. Assets remaining in a trust are valued every decade, with a 6% charge imposed on the total asset value. An additional 6% may be payable when the trust is closed or assets are removed, applicable to anything over the nil rate band (£325,000).
Trusts are a valuable addition to your estate plan, offering benefits like reducing IHT, protecting assets, and retaining control over asset distribution.
Contact Infinity Later Life today for expert advice on selecting the right trust for your needs. We will assist you in crafting an estate plan that ensures your loved ones' future security.