Timeless trusts

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Timeless trusts

October 2019

This article is taken from our autumn 2019 edition of Equinox. You can view the full version here.

When crusaders hoisted their spears and swords  to forge war on their enemies in the 12th century, what happened to the land and properties they left behind? Many chose to leave it in  the  safe  hands  of  their friends and family, trusting them to protect their home and property for them and their heirs. However, when they returned, some found that those so-called friends and family had taken the properties for themselves they had betrayed their trust.

Thankfully for the crusaders,  the  courts  stepped in and ordered that the properties be  returned. The temporary owners were only supposed to be guardians or ‘trustees’ after all.

With that, the concept of a trust was born, and nine centuries later there are many types  of  trusts  for many purposes. These  days,  whilst  we  don’t  have too many crusaders setting up trusts at  Equilibrium, we do have a number of  clients  who  use  them  as part of inheritance tax and intergenerational planning strategies.

The process of setting up a trust still works largely the same way as it did in the 12th century. There are “three certainties” required for a trust to be valid which are: the intent to create one; the subject matter (that is, the property or asset itself); and

the object (who is going to benefit). If you have these three posts covered, then you have a trust. These certainties should be outlined in a trust deed and, whilst costs will vary depending on the solicitor or specialist you choose, our research indicates that it costs on average around £750 plus VAT and legal fees.

Sadly, for any crusaders out there, one fundamental difference in 21st century trust planning is that, once in a trust, they cannot take ownership of their property back. Retaining  a  claim  on the property or asset placed into trust would be a reservation of benefit, so affordability is a key factor in trust planning.

So, if you don’t get to keep the property, then who does? The decision of which beneficiaries get what and when lies with the trustees. An individual creating a trust (known as the settlor) can name themselves as a trustee to retain some control, they can also create an ‘expression of wishes’ to guide any other trustees as a trust can continue beyond their death. Beneficiaries can be named individually, or can be a class, for example children, grandchildren and remoter issue (your grandchildren’s children). Naming a class of beneficiary provides greater flexibility and in some cases protection of the assets from, for example, divorce, as there is no named beneficiary with an entitlement to the trust assets.

The inheritance tax rules  are  not always simple, but tax planning can be relatively straightforward:

  • Keep the level of gifts to a discretionary trust within £325,000 per settlor (the nil-rate band) within a seven-year period and you will not be subject to the 20% entry charge.
  • From day one, any growth in the value of the gift does not count towards your estate. The original value will fall out of your estate seven years after you initially make the gift.

Whilst tax charges can apply throughout the life of a trust (and are dependent on individual circumstances of the settlor, trustees and the beneficiaries), a simple trust strategy like this using tax  allowances  and rates in 2019 could save up to £260,000 in inheritance tax after seven years if made by a married couple using their combined nil rate band of £650,000.

What’s more, a  discretionary  trust can last for up to 125 years, meaning you are creating a legacy for your children, their children and  beyond. As an experiment, at one  of  our recent inheritance tax seminars we asked  attendees  to  stand  if they could remember their parents’ first and middle names and then their grandparents’. No one was standing by the time we got to great grandparents, but they  all  agreed they might have remembered if their great grandparents had paid for their education or helped them onto the property ladder.

Much like the legacy given to us by the crusaders, a modern-day discretionary trust invested over the long term, taking advantage of the potential for compound  growth,  can be capable of life-changing results for future generations of your family.

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