The family trust – armour for protecting your assets

Could you preserve wealth for future generations by using a family trust, and what are the advantages to using one?

Having worked hard all your life to build your wealth and a family legacy for the future generations to enjoy, without careful tax planning, this could leave HMRC being the biggest beneficiary of that wealth.

Let’s start with what a family trust is and how you can create one.

A family trust is a three-party managed (fiduciary) relationship, whereby the creator of the trust, (the settlor), transfers assets such as property to a trustee, (the controller of the trust), for the benefit of specified beneficiaries, (the ones who enjoy the trust assets). A Family Trust can be created during a lifetime or on death through a will.

There are several reasons one might want to use a trust, which include:

Asset protection

If you are worried that your children are going to divorce in the future or if they have a spendthrift partner who isn’t good at keeping their spending under control, then a trust may help.  Once assets are gifted absolutely (not in trust), any assets within your children’s estate will go into the matrimonial ‘pot’ on divorce and could then be divided up, with your child potentially losing 50% of their share. Alternatively, those same assets, put into trust, are can protected from this situation.

Sometimes beneficiaries also need protecting from themselves.  A trust arrangement can do just that, and using the right trustees, they will be able to guide those very beneficiaries into making wise decisions now that will benefit them in the future.

Once assets go into trust, they can still be used by beneficiaries however you are putting a layer of protection in, that your wealth deserves.

Tax

A trust won’t completely wipe out the need to pay any tax; but what it does do, is give you the flexibility to control and mitigate your tax liabilities in the future. Wealth can be taxed multiple times by way of generational Inheritance Tax.  This can have a significant effect on the value of family assets, in its simplest form, taking 40% of the value each time.

As an example, where Mum and Dad leave £2 million to their children, the Inheritance Tax payable could be a minimum of £400,000.  Where the children then pass away and that inheritance of £1.6 million goes down to the next generation another inheritance tax bill is due, at an amount of £240,000, ignoring any assets the children may have of their own.  Using a trust can help to mitigate this position and protect the wealth for those future generations.

If you are interested in receiving further details of any of the topics mentioned or have any specific questions, please contact us.