Utilising Trusts for Bloodline Planning

The correct use of Trusts provides protection and control of your Assets

As detailed elsewhere on this site, your children and grandchildren’s future inheritance can be at risk from several threats.

Taxation is one, but inheritances can be impacted by several other more emotional issues such as Care Costs, where an Estate can be reduced significantly in value to pay for these costs.

Family homes may have to be sold, and income and investments drained, seriously reducing any subsequent inheritance.

Family circumstances can also be a concern. It may be that there are some family members you would wish to benefit and some that you wouldn’t. A classic scenario would be an individual who has married into the family, but you wouldn’t want to benefit from your Estate.

Similarly, if an individual inherits assets but then is later subject to bankruptcy proceedings, or has creditors liabilities, then the whole inheritance could be at risk.

The correct Trusts can provide the protection and control of your assets from those risks noted above. This protection can extend from the family home, to investment products and a business that you have a shareholding in or own outright.

A standard Mirror Will doesn’t protect your Assets, effective Estate Planning affords Asset Protection for generations to come.

Solicitors ask you how you want your Asset Planning prepared… they don’t “advise you” on how it should be structured to best meet your needs, now and into the future.

On your demise, would you want your personal affairs, including the value of your estate, who the Beneficiaries of your Estate are, the amounts they will receive, who you may have deliberately excluded an inheritance, etc, to be made public? On your death your Will becomes public record, however, if your Will directs your assets into Trust, this is avoided, as Trusts are not for public record.

Frog Wealth Management work in association with a Tax and Trust Corporation who are Estate Planning Specialists, not general practicing High Street Solicitors.

The use of Trust Planning is not for the exclusive use of the wealthy, Trusts are for anyone wanting to preserve their hard-earnt wealth for future generations

Asset Protection using Trusts is essential – that’s why we’re here to help. Check out our short guide to Trusts and property ownership

A Trust is an obligation, binding a person (which can be an individual or a company) called a ‘Trustee’ to deal with ‘property’ in a particular way, for the benefit of one or more ‘Beneficiaries’.

Trustees are the legal owners of the Trust Property. They are legally bound to look after the Property of the Trust in a particular way and for a particular purpose. Trustees administer the Trust and in certain circumstances make decisions about how the Property in the Trust is to be used.

The Trust can continue even though the Trustees might change, but there must normally be at least one Trustee.

The Property of a Trust can include:

  • Money.
  • Investments.
  • Land or buildings.
  • Other assets, such as paintings.

The cash and investments held in a Trust are also called the ‘capital’ or ‘fund’ of the Trust. This capital (or fund) may produce income, such as interest or dividends. The land and buildings may produce rental income. The way income is taxed depends on the type of Trust.

A Beneficiary is anyone who benefits from the Property held in the Trust. There can be one or more Beneficiaries, such as a whole family or a class of people (such as children), and each may benefit from the Trust in a different way.

For example, a Beneficiary may benefit from:

  • The income only, or
  • the capital only, or
  • both the income and capital of the Trust

A Settlor is a person who has put Property into the Trust. Property is normally put into the Trust when it is created, but it can also be added later.

Normally a Trust is created by a Deed. A Settlor might ask a Professional Adviser to draw up a Trust Deed, which then sets out the terms of the Trust.

A Trust can be created under the terms of a Will, when someone leaves instructions that when he or she dies, some or all of their Estate is to be placed in Trust. A Trust can also occur if a person dies without leaving a Will.

Sometimes the Courts will create a Trust, for example; when deciding how to deal with Property for the benefit of a child, or an incapacitated person, who cannot manage his or her own affairs.

A Discretionary Trust is a Trust that gives the Trustee(s) discretion to pay the Beneficiaries as much of the Trust income and or capital, as the Trustees believe appropriate. There is only one category of Beneficiary, which Frog Wealth Management name as being Potential Beneficiaries.

There needs to be several Potential Beneficiaries, rather than just one, to ensure there is discretion as to who could benefit from the Trust Funds. Given that the Beneficiaries are only potential Beneficiaries, none of the Trust Funds are deemed to be in any of the Beneficiaries’ Estates.

This means that, on the death of a potential Beneficiary, the Trust funds would not impact their Estate for IHT purposes.

Rather than using Discretionary Trusts set up via the Will, Frog Wealth Management recommend using a Pilot Trust (referred to as our Family Trust) to receive assets up to the available Nil Rate Band.

A Pilot Trust is a Trust established today with £10 which can receive further assets in the future. The Pilot or Family Trust is a Discretionary Trust established today, which will receive up to the available Nil Rate Band upon death, as directed from the Will.

Depending on the Estate size and type of assets, further Pilot Trusts maybe need to be established, to provide even greater asset protection and tax efficiency.

Management of the Pilot Trusts created by Frog Wealth Management enables us to reduce future periodic and exit charges, tax charges, which cannot be managed efficiently with Discretionary Will Trusts.

The Discretionary Trust provides flexibility, so any Beneficiary from a wide list of categories e.g. Spouse, children, grandchildren, can benefit at the Trustees discretion.

The Settlor of each Trust leaves a Memorandum of Wishes for the Trustees to follow after their death and this ensures monies are used for the appropriate Beneficiaries. However, the maximum that can be directed to the Discretionary Trust upon death is the Nil Rate Band. Should any assets above this value enter and remain in the Trust, 40% will automatically be charged to the assets above the Nil Rate Band, upon first death.

By directing up to the Nil Rate Band to our Family Trust, assets can remain under the control of the surviving spouse rather than the children, this prevents any problems in terms of access and use of funds; our strategies ensure you retain total control of the Trusts.

One of the Trustees of the Discretionary Trust will often be the surviving spouse. Appointing a Professional Trustee is almost always advisable. It is wise to have at least two Trustees.

The Beneficiaries of the Trust will usually be the surviving spouse, the children and grandchildren.

Should the surviving spouse require capital or an income, the Trustees can appoint money to him/her as required. However, as the spouse benefits only at the discretion of the Trustees, the value of the trust property will not be included in the survivor’s Estate and IHT is thus saved on second death.

It is quite clear who can benefit from the Trust and indeed who is not entitled to the Trust Funds. Claims cannot be made to the Trust Funds by estranged partners or creditors. Local Authorities cannot include Trust Funds as part of Estate values for those needing Care.

In addition to this, a second step of strategy is advised and further Trusts are needed for assets above the Nil Rate Band, which are part of the Estate at the time of death.

For married couples or civil partnerships, the Interest in Possession (IIP) Trust would be utilised to cater for the residue of the Estate over and above the Nil Rate Band.

The Trust can provide the flexibility for the surviving spouse (or any other appointed Trustees) to release capital from the Trust as needed for his/her benefit, or to release to the children or other specifically named Beneficiaries.

Whilst initially, the surviving spouse only has a right to income or use of assets, this “interest in possession” means that for IHT purposes, the assets are deemed in the surviving spouse’s Estate and so taxed upon second death.

Much depends on the planning decided with regards to the Properties and their ownership as to how much could be directed into the IIP Trusts. Having said that, the theory is that it would be the balance of assets in each individual’s Estate above the Nil Rate Band, which would be directed to them.

Assets receive the guaranteed protection of the Trusts on first death, a second death may occur many years later and we have no idea what legislation may be in place at that time. So, we advise maximising the opportunities that we know exist today.

Additional IHT planning can be achieved by the surviving spouse should he/she give up all or part of his/her life interest.

Should he/she give up all or part of her life interest, then this is treated as a Gift.

However, the surviving spouse loses access to these funds and needs to live for seven years for the strategy to become fully effective.

Should he/she survive the necessary seven years, the asset then escapes Inheritance Taxation upon second death.

The proposed strategy is designed to provide maximum flexibility and opportunity for further IHT mitigation, decisions can be made by you today or, dependent on the surviving spouse’s position at that time.

Possibly not a decision the surviving spouse would make in whole, but the decision does not need to be taken until after the first death.

Legally, there are two types of joint ownership, joint equity or property co-buying. You can either own the property as ‘Joint Tenants’ or as ‘Tenants in Common’. However, don’t be put off by this terminology. It has nothing to do with Tenancies and applies to Freehold or Leasehold land.

Under this agreement, the joint owners both own the whole property and do not have a particular share in it. If one of the owners dies, the other automatically becomes the sole owner. This would be the case, even if a Will had been made, leaving the deceased owner’s ‘share’ to someone other than the co-owner.

This is the opposite of Joint Tenancy in that the Tenants in Common, each have a definite share in the property. For example; A and B could own the property in equal shares, or A could own one fifth with B owning four fifths. This would be the most appropriate agreement, where people want to own a property in separate pre-determined shares.

Under this form of ownership, if one of the owners dies, his or her share of the property will pass on to whoever he or she specifies in a Will. It is strongly recommended that a Will be made when buying a property as Tenants in Common.

If a Will is not made, then your share of the property will be distributed in accordance with the rules of intestacy (dying without leaving a valid Will).

This depends upon personal choice and your particular circumstances. The Joint Tenancy is most commonly adopted between married couples, where there is perceived to be no advantage in defining separate shares in the property and where it would be the intention that on the first death the property would automatically pass to the surviving spouse. The problem with this is that the whole of the property will pass into the survivor’s Estate upon first death, which may then mean that the property will be assessed for Care Costs and have IHT implications on second death.

The alternative basis of a Tenancy in Common will often be used between brothers and sisters, parents and children, unmarried couples, business partners and the like. In these relationships, it might be desirable for specific shares in the property to be identified and for each owner to be able to leave his or her share in the property to a named person, other than the owner, or to a Trust for further planning.

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