What can trusts do beyond tax planning?

When you start thinking about passing wealth on to the next generation, there is usually more to consider than simply how much Inheritance Tax (IHT) your family might have to pay.

You may want to reduce the value of your estate for IHT purposes, but you might also want to make sure your children or grandchildren receive their inheritance at the right time, in the right way and with the right safeguards around it.

Your children may still be young; you may be concerned about what could happen to an inheritance in the event of a divorce; or perhaps a family member is vulnerable, and you want to make sure they can benefit from your wealth without having to give them full control of the assets.

This is where a trust can be worth considering.

What is a trust?

In simple terms, a trust is a legal arrangement that allows assets, such as cash, investments or property, to be held and managed for the benefit of other people.

There are three key parties involved:

• The settlor – the person who puts assets into the trust.
• The trustees – the people responsible for looking after and managing the trust assets.
• The beneficiaries – the people who may benefit from the trust.

Rather than giving assets directly to a beneficiary, a trust creates a structure around how and when those assets can be used. This can provide families with greater flexibility and peace of mind when planning for the future.

 

Why do people use trusts?

While trusts can be effective for IHT planning, many families choose them for the non-tax benefits they also offer.

For example, you may not want a child or grandchild to receive a substantial gift outright at a young age. A trust allows assets to be managed for their benefit and can help provide future support for education costs, buying a first home or other significant life events – at the same time, the trust may protect the asset from a 40% IHT charge.

Trusts can also be valuable where a beneficiary is vulnerable due to age, disability or personal circumstances. Rather than inheriting assets directly, trustees can manage funds and make decisions regarding how to use the assets in the beneficiary’s best interests.

They can also provide an additional layer of protection if family relationships change. While a trust is not a guarantee against divorce or other financial claims against a beneficiary, assets held within a trust may be better protected than assets gifted outright.

Finally, a trust can help provide future flexibility around who benefits from the wealth you have created for the long term without generating unwanted tax charges. Initially the trust could be used to support your children as they establish their adult lives. Further down the line, as circumstances change and grandchildren arrive, the Trustees can retain the flexibility to direct funds to the next generation, for example to help with grandchildren’s school or university fees.

For many families, the benefit is simple: A trust can help ensure wealth is passed on in a controlled yet flexible way, rather than handing over a large gift or inheritance with no asset safeguards in place.

 

Trusts and Family Investment Companies

Family Investment Companies (FICs) can also form part of long-term family wealth and succession planning and are often used alongside trusts.

A FIC can provide a structured way of holding and investing family wealth while allowing the founders to retain an appropriate level of control over the management of the company. Trusts can then be used alongside a FIC, for example by holding shares in the company for the benefit of children, grandchildren or future generations.

Used together, the two structures can provide different layers of flexibility and tax efficiency. The FIC can provide the investment and governance framework and reduce ongoing tax charges on investment returns, while the trust can help determine how and when value passes to beneficiaries and provide additional protection around family wealth.

The interaction between trusts and FICs can also create valuable estate planning opportunities.

Is a trust right for you?

There is no one-size-fits-all solution when it comes to estate planning. The right approach will depend on your assets, family circumstances, future objectives and the level of control and flexibility you would like to retain.

For some families, reducing IHT may be the main objective. For others, protecting family wealth and supporting future generations is the priority. More often than not, it is a combination of both.

 

How can AAB help?

At AAB, we help individuals and families look at the bigger picture. Our Private Client team works with clients to understand their circumstances, identify potential planning opportunities and create tailored solutions that reflect their family’s long-term objectives.

We can assist with:

• Inheritance Tax planning
• Trust advice and structuring
• Lifetime gifting strategies
• Family wealth and succession planning
• Planning for vulnerable beneficiaries
• Trust administration and compliance
• Trust Registration Service requirements
• Ongoing trust reviews

Our approach goes beyond tax planning. We help clients consider how their wealth can best support the people who matter most, both now and in the future.

Protecting your legacy is about more than reducing tax

A trust can provide more than potential tax savings. It can offer protection, flexibility and peace of mind that the wealth you’ve worked hard to build will benefit the people you care about in the way you intended.

If you’re concerned about the Inheritance Tax your family could face or simply want to explore whether a trust could form part of your estate planning strategy, please get in touch with Steve Roberts, Tracy McGarry or your usual contact in our Private Client team.

After all, estate planning isn’t just about tax. It’s about your family, your wishes and the legacy you want to leave behind.