Using a trust to retain control of the money you leave behind
Perhaps this is the Christmas to have that emotive but crucial discussion.
In this article, we talk about why more and more of our clients are using trusts as part of their estate planning. Putting a plan in place can of course be emotional, but being open and transparent can also be extremely positive. At CBW Financial Planning, we highly recommend such an approach and we often work with more than one generation. Maybe this Christmas is the time to broach the subject with your family; get in touch with us in the New Year and we can move towards a plan together.
A 2020 survey from Canada Life found that 59% of UK adults don’t have a Valid Will1. Dying without a Will is known as dying ‘intestate’ and it can be an incredibly complex situation for family members.
Having a Will ensures your assets end up where you want them to be, as CBW Trust & Estates Manager Amanda Revell explains in more detail here.
But a Will is not the be all and end all. A Will alone doesn’t ensure your wealth is used as you see fit, and it doesn’t prevent inheritance tax (IHT).
Listen to the latest CBW Financial Planning podcast which dispels some assumptions around estate planning.
One of the key points is that you don’t have to wait until you’re gone to see your estate plan in action.
Placing money in trust means retaining control over who gets what, and when. The settlor determines the caretakers of the funds (the trustees), the potential beneficiaries and acceptable uses. Some of the reasons our clients have chosen to use trusts include:
- To make provisions for family members under 18.
- To help protect assets against future divorce or bankruptcy.
- To provide a framework for family members who aren’t good at managing money.
- To split the income and/or use of, an asset from current and future beneficiaries.
- To prevent estate-dilution through multiple IHT
A real-life scenario explains this better than I can:
Clive and Margaret have an estate worth £2.7m. They don’t have Wills, so everything will be left to their son Ted, who has two daughters with his wife Carla.
Option one – leave everything in the bank
Ted pays £820,000 in IHT when Clive & Margaret die, and Ted inherits £1.88m (net).
The following year Ted divorces Carla and they split everything 50/50.
Carla remarries and leaves her full estate to her new husband when she dies.
When Ted dies, his children inherit his share of Clive & Margaret’s estate, now worth £940,000.
Assuming Ted has other assets, which use up any Nil Rate Band allowances, Ted’s estate must pay a further £376,000 in IHT on this previously inherited money.
Of Clive & Margaret’s £2.7m, the grandchildren have only received £564,000.
Option two – create lifetime trusts
Clive & Margaret decide to put £650,000 into a trust, choosing potential beneficiaries and uses for the money. Seven years later they repeat this with another £650,000.
When they die ten years after creating the second trust, their estate value is £1.4m (plus the separate trusts worth £1.3m). After accounting for Nil Rate Bands, Ted pays £160,000 in IHT on their remaining estate and is left with a net inheritance of £1.24m.
Ted & Carla still divorce, but the trust assets are excluded from the settlement.
During the next 21 years, Ted adds £325,000 to three trusts.
When Ted dies, we’ve assumed he has other assets, which use up any Nil Rate Band allowances. Only £265,000 of the previously inherited money is ‘exposed’ to IHT, due to the trusts.
His children pay £106,000 in IHT. They’re beneficiaries of trust assets worth over £2,275,000 and have their dad’s net estate.
Many years after Clive & Margaret have died, the money they worked hard for is paying for their great granddaughters to attend university.
Estates and IHT are complicated and whilst the use of Trusts are one way of helping mitigate IHT, there are many other ways as well. In some cases you do not have to give anything away. Careful planning, with help of a financial adviser, can help mitigate your estate’s IHT.
What next?
As always, the Financial Planning Team are on hand to discuss any thoughts or concerns that you may have about estate planning, so please do not hesitate to contact us.
1 https://www.canadalife.co.uk/news/31-million-uk-adults-don-t-have-a-will-in-place/
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