Setting Up An Inheritance Trust Fund: What You Need to Know

Setting up an Inheritance Trust Fund

Many of us think of trust funds as a way for children of the mega-rich to enjoy a luxurious lifestyle. With our ever-changing world of extended families and more complex financial needs, many of us are considering setting up an inheritance trust fund.

So for those who are perhaps divorced, want to protect money for children of first marriages, pay for children’s education or even help to avoid family quarrels, an inheritance trust fund could have benefits.

In general, consider the aims and objectives of the trust. List the assets and/or incomes. Decide who the beneficiaries are, along with how and when they will receive the benefits. Also, select 2-4 suitable trustees to manage the fund. Once outlined, discuss in detail with your solicitor.

What is a trust fund?

Trusts, in essence, are a way of safeguarding assets such as money, land, property or investments which can be passed on to your loved ones by way of inheritance.

It helps to manage these assets and also details any tax requirements.

They are legal arrangements where money and other assets are given to one person to hold on the behalf of another, for example, children or grandchildren.

There are two main trust categories

There are two main categories of trusts. Those created while you are living, are called lifetime trusts, and those that are set up in a Will. These trusts are actioned upon the death of the instigator of the trust, commonly known as the settlor.

They can be complex to unravel, mainly because the terms used can vary between solicitors and other financial services operators.

Many of the terms used can describe a wealth of different types of trusts all with different outcomes, and benefits.

So if you are looking to set up an inheritance trust fund in Wales or indeed anywhere else in the UK, it’s always best to consult with the best legal experts.

“Trusts, in essence, are a way of safeguarding assets such as money, land, property or investments”

How to set up a trust fund – the basics

Here’s a simple step by step guide to setting up a trust fund in the UK.

Step 1: Decide on the broad aims and objectives of creating a trust, the people and assets involved

Step 2: Create a details list of all assets, and their value, that will be placed into the trust fund. This will save time later.

Step 3: Designate 2-4 appropriate individuals to be nominated as the trustees. Choose sensible people, ideally with some financial knowledge and of an age to potentially outlive you.

Step 4: Decide on both who the beneficiaries will be, and which portion of the income or assets will pass to each of them

Step 5: Outline the more detailed terms of the trust. You can discuss fine details with your solicitor. Include how and when beneficiaries will receive the income or asset, when, trust management and potential termination.

This should give you a great starting point to set out the framework for your trust. It’s good preparation before sitting down to go through the fine details with your solicitor.

Are there any benefits to an inheritance trust fund?

Many people choose an inheritance trust fund because of its main benefits.

With the best inheritance trust funds, the main advantage is the level of control. It means you have direct authority as to who gets to benefit from your assets.

You are also able to decide on a trustworthy representative to adhere to your wishes and who will make sure your financial requests are taken care of.

Another benefit of an inheritance trust fund is that depending on the type, you may be able to get around some tax requirements.

However, this isn’t a given and in some cases, you may even have to pay more. So it’s always best to consult with legal specialists who will be able to explain tax benefits and other tax issues more fully.

“With the best inheritance trust funds, the main advantage is the level of control.”

Can I put assets into an inheritance trust fund or only money?

Along with money, in general, most assets can be put into a trust fund.

These might include property and other personal possessions. It’s worth getting some expert advice if, for instance, you have rental property. If you own a house that you don’t live in, it could mean an extra capital gains tax bill.

Is there a limit to how much money I can put in an inheritance protection trust?

It’s worth understanding that there are no limits to the amount of money you put in an inheritance trust fund.

However, if you include assets or money that take you over the nil rate band, inheritance tax is immediately due.

The nil rate band is often referred to as NRB and is also sometimes called The Inheritance Tax Threshold or IHT.

There are ways you can make this work more beneficially for you in terms of tax, for instance only putting a portion of your house in trust.

An experienced trust fund specialist will be able to help you with this.

What types of inheritance trust funds are there?

Discretionary trust

This type of trust can be set up when making a Will. Essentially its purpose is to give those you have appointed to look after your money, how, when and who receives the inheritance.

Some of your estate or all of it can be included in a discretionary trust. It provides a flexible way of leaving money and other assets to children or grandchildren and protecting family inheritance.

Interest in possession trust

This type of inheritance trust is very often used for protecting children’s inheritance of anyone who has remarried following a divorce.

In an Interest In Possession trust, those who benefit from the trust can receive any income immediately. Although they are not allowed access to either the money, property or other assets that gave rise to the income.

It’s important to understand that any beneficiary of a possession trust will need to pay income tax on the income.

“This type of inheritance trust is very often used for protecting children’s inheritance of anyone who has remarried following a divorce.”

Protective property trust

With many families experiencing extended requirements in our contemporary world, homeowners need to secure their homes, investments and other assets for those that need them.

Similar to an Interest In Possession trust, a Protective Property trust is often used when there are children from a previous marriage. In cases for instance where they would like their spouse to continue living in the family home.

This type of inheritance trust is also suitable for couples who want to make sure there are enough funds for any long term care requirements. Couples, especially where one of them may need long term care in the future.

However, it’s worth understanding that setting up this type of trust purely to avoid care costs is illegal. Seeking specialist legal advice will help you understand any implications.

“This type of inheritance trust is also suitable for couples who want to make sure there are enough funds for any long term care requirements.”

Can you use a trust to cut inheritance tax?

As we noted earlier in the article, although a trust may reduce some tax obligations, it’s not a given and the actuality is you could end up paying more.

One of the reasons you may not pay as much tax is that once the money, property or investments are part of a trust, they are no longer counted as part of your inheritance tax bill.

However, it is a common misconception that tax of any sort isn’t required on inheritance trusts.

Tax will still be due at the time the trust is set up if it’s over the nil rate band, however, there are sometimes some exceptions, where  a specialist in trust funds will be able to explain more

And finally…

So although the subject of inheritance trusts can be complex to navigate, there are many benefits to setting up funds where your family and loved ones will benefit.

Here at Robertsons Solicitors, we provide a wide range of legal services to clients looking for first-class service. We boast outstanding reviews, expertise and crucially a client-focused approach.

Click here to talk to one of our experienced solicitors about any of your inheritance trust fund questions.


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