Trusts: not just for the super-rich

Many people associate trusts with the super-rich and the tax manoeuvres of large multi-national corporations, and they are sometimes linked to tax avoidance. This means that they believe that trusts are not suitable for them and miss out on their benefits.

Trusts are useful legal devices for asset protection purposes and they can be of great help to individuals in a range of financial positions. Here are four examples of their use:

Second marriages

Many people marry more than once and have children from more than one relationship. Often the best method for them to make financial provision for their surviving spouse and ensure that ultimately their assets pass to their children, is to include a trust in their Will. The trust provides that the surviving spouse is entitled to the income generated by the assets of the first spouse to die, generally during their remaining lifetime. On the surviving spouse’s death, the capital then passes to the children of the first spouse to die.

The trustees are in charge of the trust fund during the surviving spouse’s lifetime and will invest it to balance income and capital returns. Sometimes the trustees will be given power to give or loan capital to the surviving spouse. The only asset of this type of trust could be the home in which the couple live. To ensure maximum flexibility, the surviving spouse might be given the right to request a sale of the former matrimonial home and purchase a new property that would be held on the same trusts. This type of trust does not save any tax, but it protects the trust capital for the next generation.

Disabled person’s trusts

An individual may wish to make financial provisions for someone who is disabled, perhaps their child. The child’s disability may mean that that they are not capable of managing any money left to them, or that their welfare benefits entitlement would be affected if the money were left to them outright, leading to the money being spent on day-to-day living expenses. Putting the money into a trust, either created during lifetime or in a Will and coming into effect on death, will mean that the trustees can manage the assets on behalf of the disabled person and their benefits should be unaffected. If a disabled person’s trust is used, the trust will have certain tax advantages as laid down by act of Parliament. Again, protection is the primary motivation behind creating a trust of this nature.

Personal injury trusts

If a person suffers a personal injury caused by a criminal act or someone else’s negligence, and is awarded compensation or damages, it can be advantageous for them to set up a personal injury trust. Such a trust will ensure that the personal injury payment is ignored when calculating the injured person’s entitlement to welfare benefits or in deciding what financial help they receive towards any residential care fees. Once again, the existence of the trust can protect the injured person by allowing others to take over the management of the money on their behalf.

Trusts for general asset protection

Someone might wish to give a valuable asset to their child, perhaps to set them up in life, or because the law allows the value of assets given away more than seven years before death to be left out of account when calculating inheritance tax liabilities on an estate. If the intended recipient is young, unskilled at handling money or at risk of a divorce, the person making the gift might consider using a trust to hold the asset for the potential beneficiary. The use of the trust would not necessarily reduce the tax liabilities of either the person making the gift or of the recipient any more than the saving from an outright gift. However, a far greater level of asset protection is achieved as the independent trustees take care of the asset and the beneficiary is protected from their youth or inexperience.

If you would like more information on how you could benefit from setting up a trust, please call 0800 652 8025 or contact us online.