Understanding Wealth Protection & Tax Planning with Trusts

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Everyone wants to look after their family’s future and ensure subsequent generations can benefit from their hard-earned wealth. Two of the key elements of this is to protect assets and reduce tax liability, thereby safeguarding as much of what you own as possible.

But how should you go about this? The answer lies with setting up trusts. These financial vehicles are extremely flexible and can ensure your assets are passed down exactly as you wish, while reducing tax implications for future generations. 

Understanding how wealth protection and tax planning with trusts works is crucial to achieving your financial goals. This is why it’s recommended to see specialist advice from experienced private client solicitors at your earliest opportunity.

What Assets can be Put in a Trust?

There are a number of assets that can be safeguarded within trusts. These include:

  • Property
  • Stocks and Shares
  • Life Insurance
  • Financial Assets
  • Money
  • Bonds
  • Art
  • Digital Assets
  • Shares of a Company

Given the sheer volume of assets that can be placed into trusts, it’s no surprise that they have become an extremely popular method of safeguarding a person’s wealth.  

What are the Benefits of a Trust?

There are many reasons why individuals and business owners would choose to set up a trust as part of a comprehensive wealth management strategy. These include reducing the value of your estate, controlling how your assets are distributed, and managing the affairs of someone who’s incapacitated. 

Let’s have a look at the benefits of a trust in more detail:

– Reducing an Estate’s Value

When you place assets into a trust, depending on how long you do it before your death, they may not be taken into account when your estate is assessed for probate. As a result, they may not be subject to Inheritance Tax (IHT). 

– Using up Allowances & Exemptions

Trusts could also enable you to take advantage of annual allowances and exemptions, which again will reduce the amount of Inheritance Tax payable on death. 

– Controlling Asset Distribution

Using a trust as part of your estate planning strategy gives you a greater degree of control over how your assets will be distributed on death. This can be particularly useful in cases of divorce, as a means of preventing certain people from benefiting from your estate.   

– Dealing with Incapacitation

Another way of utilising a trust is to outline what should happen to your assets and how your affairs should be managed if you no longer have the mental capacity to oversee this yourself. This is particularly useful for business owners, as trusts can stipulate how company shares are to be distributed. 

Protecting Assets & Tax Planning with Trusts: How Does it Work?

There are several ways in which you can use trusts for tax planning and wealth management purposes. Here are just a few: 

– Inheritance Tax

This is perhaps the most common example of tax planning with trusts. As per current legislation, (February 2024) it’s possible to place assets up to the value of £325,000 (known as the nil rate Inheritance Tax band) into a trust every seven years, without incurring any charges. 

There are factors, such as business reliefs, that can enable you to put even more money into a trust Inheritance Tax-free — so it’s a good idea to ensure you’re aware of all the options available to you.  

Provided the gift is made at least seven years prior to death, the value of the assets within will not be included as part of the estate. Even if this does not transpire, exemptions could still apply, so it’s worth talking to an experienced tax planning solicitor who can help. 

If you’re married or in a civil partnership, you are able to combine your nil rate IHT allowances, meaning up to £650,000 worth of assets can be added into a trust every seven years.  

– Business Succession Planning

If you own a business, trusts can be a crucial way to ensure your professional legacy is protected. This is because a trust can form part of your last will and testament to stipulate how you want your shares to be distributed on death. 

Setting up a trust can also help other shareholders and business partners understand what should happen with your shares if you decide to retire or become incapacitated in some way in the future, potentially reducing the likelihood of a dispute arising

It’s worth pointing out that a trust is just one element of a comprehensive business succession planning strategy, so it’s recommended to seek specialist legal advice to ensure everything is taken care of. 

– Capital Gains Tax (CGT)

When you gift an asset to a family member, Capital Gains Tax will become payable if the item has significantly increased in value. Effective tax planning with trusts can ensure the amount of CGT charged is either reduced or deferred. 

– Income Tax

Any income which comes from assets held in a trust can be shared out amongst family members to take advantage of their lower band of Income Tax and personal allowances. This can greatly reduce the amount of Income Tax payable.

Utilising this method of tax planning with trusts does not result in a loss of control of the assets themselves, so you can be confident that they’ll remain protected. 

Can You Use Trusts to Avoid Care Home Fees?

Although it is possible to use a trust to protect some of your assets if you need to go into a care home, this must not be the underlying reason why you’re setting one up. Specifically creating a trust to avoid care home fees could be seen as a deprivation of assets and result in a number of different penalties. 

If a local authority suspects that you’ve deprived yourself of certain assets in order to get around care home fees, they could decide to do one of the following:

  • Recover the value of the asset from the person who received it
  • Act as though you still own the asset that was given away and recover its value from you
  • Attempt to declare you bankrupt
  • Apply for a County Court Judgement (CCJ) against you

Provided the trust has been set up as part of a regular wealth management or tax planning strategy, any assets included in the trust should be ring-fenced if you do need to go into a care home. The laws around this can be quite complicated, so it’s important to speak to a specialist before you proceed.  

How Often Should You Review a Trust?

While successful tax planning with trusts is effective for reducing your liability and protecting your wealth, this is only the case if the trust remains fit for purpose. Tax laws regularly change, as does the value of certain assets, so it’s recommended that you review your trust every year to ensure everything is working as intended. 

Your trust should also be reviewed every time there is a significant change in your personal circumstances, so you can be sure the trust adequately reflects your current situation. Examples of a change in circumstances include marriage and divorce, buying or selling a house, and the sale or purchase of a business

If you’re ever unsure about whether your current trust is working as intended, it’s important to seek specialist legal advice at your earliest opportunity.

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Specific Wealth Protection & Tax Planning Advice from Thursfields

A thorough comprehension of wealth protection and tax planning with trusts is essential if you want to ensure the futures of your business and family are secured. No two individuals are the same, however, so it’s important that this knowledge and expertise is supported by an ability to tailor the advice given to represent an individual’s unique circumstances.

Thursfields is a law firm that’s built around our clients. We take the time to understand your situation and goals, before devising a tailored strategy that’s designed to deliver your desired results. In addition, many solicitors within our team are members of the reputable Society of Trust and Estate Practitioners (STEP) and have also been mentioned within the Legal 500 — so you can rest assured you’re in safe hands. 

We’ve supported countless individuals across the country and given them the peace of mind they need that everything is taken care of — and we’re ready to do the same for you. Contact our team and get started today.

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