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Trusts aren’t just for the rich; here’s why you need a Trust in your Estate Plan

Trusts / 08 Feb 2019
Alison Johnston
Alison Johnston

Trusts are typically seen as the preserve of the wealthy. Inspiring images of trust fund kids living off their ancestor’s wealth or plot devices in Jane Austen novels. A tool which is used to help those who have millions of pounds protect their wealth.

But ordinary people can benefit from them as well. Put simply, a Trust is a way for you (known as the settlor) to ring-fence money or an asset such as property or stocks for someone else to benefit from (the beneficiary), you or someone is then appointed to manage the trust (the trustee). Trusts are included in your Will (known as a Will Trust) and are a powerful estate planning tool.

Trust can be used to safeguard money and only release it to the beneficiary under specific circumstances.

It sounds complicated but here are some real-world scenarios where a trust could help you:

If you’d like to pass on assets to your children after remarrying

If you have or are thinking of remarrying there are just a few things to consider:

  • Under the rules of intestacy, your spouse is given priority over any children.
  • When you remarry, any previous Will is deemed invalid unless it was made in contemplation of marriage.
  • Unless you have a valid Will which states otherwise. Your new partner will inherit the first £250,000 of your Estate, and the remaining Estate will be split between them and your children.

This could mean your children inherit nothing or very little after you pass, and any assets pass on down your spouse’s line – this is known as sideways disinheritance.

Which is why it’s so important to update your Will after a significant life change such as a new marriage. However, in some situations, even a Will won’t be enough. In an ideal world, you will agree with your spouse to leave everything to each other and then eventually on to children.

But there is no guarantee they will pass to your children after you pass. Your spouse is entirely within their rights to change their Will and remove your children as beneficiaries. They could incur debts or have other costs such as care home fees which could significantly reduce your children’s inheritance.

On the other hand leaving assets to your children in your Will, such as your family home would mean they automatically pass to them, which could cause difficulties for your partner.

This is where a Trust comes into play. Assets can be ring-fenced and distributed to beneficiaries when needed. For example, using the scenario above, the family home can be held in a Life Interest Trust until the remaining spouse has passed on.

If you are a business owner

If you have your own business, on your death any shares will automatically pass to your spouse or next of kin. However, this could mean they have an involvement in the day-to-day running of the company something which you or they might not want and could cause issues for other shareholders/directors. You want your family to still benefit from the business but don’t want them to have the headache of managing it.

In this scenario, the solution is to bequest the shares to a Trust. This means the surviving spouse can benefit from the shares, such as receiving the dividend income but as they don’t own the shares, they will have no involvement with the day-to-day running of the business.

To reduce your Inheritance tax bill

Placing assets into a Trust transfers the ownership from you to the Trust. And as they’re no longer owned by you, they will no longer form part of your estate and won’t be subject to inheritance tax.

This sounds very straight forward however to prevent people using Trusts to avoid tax altogether the government has been busy closing loopholes in trust law. So it is essential to speak to an estate planner to understand what tax rules apply and if these cancel out any benefit of moving assets into one.

To look after minor children

Another way to use a trust is to be able to provide for minor children in case you pass away before they’re adults. You can decide how much money should be given to them and how much should go towards paying for their living costs, you can appoint someone you have faith in to manage the trust. This can be especially important if you’re a single, divorced or widowed parent.

To make provisions for looking after adult children

Similar to looking after minor children there are some circumstances where putting assets into a Trust is beneficial to your adult children. Such as if you have a disabled child or a child with learning difficulties then you can put money into a Trust to be used for their long term care. Or perhaps your child has another problem such as an addiction which means you’re wary of giving them a lump sum, a Trust can be used to safeguard money and only release it to the beneficiary under specific circumstances.

To make sure assets are protected from divorce further down the family line

As we mention above marriage and divorce has a significant effect on inheritance. One factor to consider is that if a child divorces their assets will be split with their ex-partner – that includes any inheritance they receive from you. It’s not something we really like to think about, but if your child has a spouse you don’t trust then putting assets into a trust for your child or grandchildren means they will continue to benefit from them.

To get your insurance policies to pay out faster and be exempt from Inheritance Tax

One little-known way of using a Trust is you put your life insurance policy into one, known as ‘written into trust. This has a couple of advantages; firstly the payout from your policy will go straight to beneficiaries instead of your estate. Which means it won’t be taken into account when inheritance tax is calculated.

And because it won’t form part of your estate, it means it doesn’t have to go through probate. Meaning payment should get to your beneficiaries quicker, and they use the funds to settle your estate. You also get more control over your policy as you can specify what happens to the payout. Such as appointing trustees to manage the money for beneficiaries under 18.

Your insurance provider or we can set this up for you; however, it would be worth having a chat with us to see how it fits in with your wider estate plan.

As you can see, there are several advantages to using Trusts as part of your estate plan. You can find more information on our setting up a Trusts page, or if you would like to discuss any further you can get in touch either by calling 020 8619 0358, filling in our contact form, or emailing