Trusts: myth or truth?
Despite many changes in the taxation of trusts in recent years, they continue to offer a flexible, tax-efficient structure to preserve and protect family wealth. Although they are useful to consider as part of succession planning, we sometimes hear of clients who have been advised that they can transfer all of their assets into trusts with the promise that this will safeguard all those assets. Of course, this sounds great and possibly too good to be true. So what are some of the promises it is claimed trusts help deliver, and are they myths or truths?
Moving your house into a trust will help to reduce the amount of inheritance tax payable on death.
If you transfer the house that you live in into a trust and you continue to live there rent free, this is unlikely to reduce the amount of inheritance tax payable on your death because it will be a 'gift with a reservation of benefit', ie. a gift that is not fully given away. If you were to transfer your home or even a share in your home to your adult children (who live elsewhere) and fail to pay a full market rent for your occupation, the property would still form part of your estate as though it had remained in your own name.
The situation may be different for properties that you do not occupy. Moving buy-to-let properties or holiday homes into trusts can reduce the size of your estate for inheritance tax purposes, so long as you have stopped using them and are not relying on the rental income top supplement your pension.
Moving your assets into a trust will protect them from care home fee means-testing assessment.
If you transfer assets into a trust, this does not guarantee that they will not be considered in an assessment of your finances for care costs. Local authorities have wide ranging powers to consider whether you have intentionally or deliberately removed any assets to avoid paying for care without any limit on how far back they can look. They also have the power to look at gifts made to family and friends and assets sold for less than they are actually worth.
If a local authority considers that you have deliberately moved your assets into a trust for the purposes of avoiding care charges, it can treat you as still owning the assets for the purposes of the financial assessment and it has the power to unwind the trust and recover the assets.
If you transfer your assets into a trust, they will be protected from any divorce proceedings that your son or daughter might go through.
There is no absolute certainty with this statement as to whether it will be possible for the trust to protect your assets because the family courts will assess each case on its own merits and the outcome will depend on the nature of the trust and the powers of the trustees.
Even if your son or daughter is only named as a potential beneficiary under a discretionary trust, meaning that they have no absolute entitlement to the assets, they will still have a duty to disclose this interest as part of the divorce proceedings. Judges have long looked at 'the reality of the situation' rather than the form of the trust. The courts will look at any letter of wishes and how the trustees have dealt with requests from the beneficiaries in the past to decide whether it should be included in the financial assessment.
Trusts can form a useful part of your estate planning measures.
Despite all of the above myths surrounding the use of trusts, they can still form a useful part of your succession planning if used properly. For example, for grandparents wanting to start the 'seven-year clock' running while retaining control, they can work well, or for parents wanting to help a child onto the property ladder while at university without releasing control of the funds. There is no 'one size fits all' with trusts so they require specialist advice and careful planning but when used properly they can help to move value out of your estate and reduce the amount of inheritance tax that is payable. They can also help your family to manage the assets you leave behind and to protect vulnerable beneficiaries from themselves as well as third parties.
Trusts have complex tax regimes once they are set up so it is always worth taking proper advice if you are considering moving assets into a trust and to check it is the right move for you and your family.
For more information on trusts, tax and succession planning, please contact James Greig or another member of the Blake Morgan Succession and Tax team