How to use trusts to pass on family wealth

Question.

I am approaching my mid sixties and I want to pass some wealth to my adult children but I would like to retain some control over these assets. Can I use trusts to do this?

Answer.

Trusts are a long established mechanism which allows individuals to benefit from the assets without assuming the legal ownership of those assets as the trustees have day to day control over the assets. A trust can be extremely flexible and have an existence totally independent of the person who established it and those who benefit from it.

Trusts can be used in a variety of situations both to save tax and also to achieve other benefits for the family. Particular benefits include:

• if you transfer assets into a trust in your lifetime you can remove the assets from your estate but could act as trustee so that you retain control over the assets;

• a transfer of family company shares into a trust in lifetime (or on death) can be a way of ensuring that the valuable business property relief is utilised;

• by putting assets into a trust you can give the beneficiary the income from the asset without actually giving them the asset;

• trusts (particularly discretionary trusts) can give great flexibility in directing benefit for different members of the family without incurring significant tax charges; and

• if you want to make some Inheritance Tax (IHT) transfers in your lifetime but are not sure who you would like to benefit from them, a transfer to a discretionary trust can enable you to reduce your estate and leave the trustees to decide how to make the transfers on in later years. It also means that the assets transferred do not now hit the estates of the beneficiaries.

There are two basic types of trust in regular use for individual beneficiaries:

• life interest trusts (sometimes referred to as interest in possession trusts)

• discretionary trusts.

A life interest trust has the following features:

• a nominated beneficiary (the life tenant) has an interest in the income from the assets in the trust or has the use of trust assets. This right may be for life or some shorter period (perhaps to a certain age)

• the capital may pass onto another beneficiary or beneficiaries.

A typical example is where the widow is left the income for life and on her death the capital passes to the children.

A discretionary trust has the following features:

• no beneficiary is entitled to the income as of right.

• the settlor gives the trustees discretion to pay the income to one, some or all of a nominated class of possible beneficiaries.

• income can be retained by the trustees.

• capital can be gifted to nominated individuals or to a class of beneficiaries at the discretion of the trustees.

A transfer of assets such as money, shares, houses or land are known as ‘relevant property’ and these type of trusts, if set up in the settlor’s lifetime give rise to an immediate charge to inheritance tax. If the value of the gift (and certain earlier gifts) is below £325,000 no tax is payable. Discretionary trusts set up under a will attract the normal inheritance tax charge at the death rate of 40%.

For capital gains tax purposes, If assets are transferred to trustees, this is considered a disposal for capital gains tax purposes at market value but in many situations any capital gain arising can be deferred and passed on to the trustees. Where assets leave the trust on transfer to a beneficiary who becomes legally entitled to them, there will be a CGT charge by reference to the then market value. Again it may be possible to defer that charge.

The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.