Use lifetime trusts to protect those most vulnerable.
Estate planning is a critical part of financial planning that involves making arrangements for the distribution of your assets after your death.
Lifetime trusts are a popular estate planning tool that can provide significant benefits for certain individuals, such as disabled, vulnerable, and bereaved minors. In this article, we will explore the benefits of using lifetime trusts and the tax treatment of various types of trusts.
What are lifetime trusts?
A lifetime trust is a legal arrangement that allows you to transfer assets into a trust during your lifetime. The trust is managed by a trustee (or trustees) who is responsible for administering the assets and distributing the income or capital to the beneficiaries in accordance with the terms of the trust.
Benefits of using lifetime trusts
Lifetime trusts can offer several benefits for individuals who want to provide for their loved ones after their death. For example, lifetime trusts can be used to:
Protect assets from potential future creditors or ex-spouses.
Provide for disabled or vulnerable beneficiaries who may not be able to manage their own finances.
Protect assets from being misused by beneficiaries who are not capable of managing their inheritance responsibly.
Provide for bereaved minors who need ongoing financial support until they reach adulthood.
Tax treatment of lifetime trusts
The tax treatment of lifetime trusts varies depending on the type of trust and the circumstances of the settlor and beneficiaries. In general, there are two types of lifetime trusts: bare trusts and discretionary trusts.
Bare trusts
In a bare trust, the beneficiary has an absolute right to the assets in the trust. Bare trusts are often used to hold investments for a child, and the child is taxed on the income and gains of the trust as if they owned the assets themselves. The settlor of the trust is not subject to any inheritance tax implications if they survive for seven years after making the gift.
Discretionary trusts
In a discretionary trust, the trustees have discretion over the distribution of income and capital to the beneficiaries. Discretionary trusts are often used for disabled or vulnerable beneficiaries who need ongoing financial support. The trust is taxed on any income and gains, and the trustees can claim a tax credit for any tax paid. The settlor of the trust may be subject to inheritance tax implications, depending on the value of the assets transferred into the trust and the settlor’s overall estate value.
Disadvantages of lifetime trusts
While lifetime trusts can offer significant benefits, there are also some disadvantages to consider. For example, lifetime trusts can be expensive to set up and administer. In addition, the taxation of trusts can be complex, and it is essential to get proper advice from a qualified professional to ensure that the trust is set up correctly.
In conclusion, lifetime trusts can be a valuable estate planning tool for individuals who want to provide for their loved ones after their death, particularly disabled, vulnerable, and bereaved minors.
However, it is crucial to understand the tax implications of setting up a trust and to get proper advice from a qualified professional to ensure that the trust is structured in the most tax-efficient way.
The Financial Conduct Authority does not regulate Taxation, Trust advice or Will writing.
Trusts are a highly complex area of financial planning.
Information provided and any opinions expressed are for general guidance only and not personal to your circumstances, nor are they intended to provide specific advice.
Tax laws are subject to change and taxation will vary depending on individual circumstances.
Ancojada Limited trading as Ancojada Group is not authorised or regulated to provide financial advice.
All financial advice is provided by other regulated businesses.