Why Is This Area Important?
The use of trusts in financial planning is becoming ever more popular as individuals seek to mitigate their exposure to Inheritance Tax (IHT). Using trusts, you can also ensure that your estate is channelled to those whom you wish to benefit.
What Solutions Are There?
Very basically, there are three types of trusts:-
Discounted Gift Trust
This trust allows the client to make an immediate IHT saving with further savings to be made after seven years, as the gift to the trust is a Potentially Exempt Transfer (PET). NB - The client must take an income from the trust. The amount which becomes immediately free of IHT depends on the client’s age, sex and the amount of income taken. The greater the income taken the greater the sum immediately free of IHT (the “discount”). The amount used to calculate the potential tax liability of the trust is the original gift placed into the trust less the “discount”.
Gift And Loan Trust
This trust allows clients to cap any further IHT liability on the capital they “loan”. Clients loan the capital to the trustee and can then take withdrawals to supplement their income, whilst any growth that is achieved on the loan amount is outside of their estate for IHT purposes. Clients can request repayment of the loan either on a regular basis or in ad-hoc amounts or a combination of both. NB - The client only has access to the loan amount, not to any growth.
Flexible Gift Trust
This trust is designed for clients who want to give away a sum of money which is surplus to their requirements (i.e. to which they no longer require access). The donor cannot benefit from the money gifted to this trust although they can retain control over who will ultimately benefit.
The Ability To Place Insurance In Trust
It is not just capital that can be written in trust: insurance policies can also be put in trust. This is useful when personal circumstances do not allow capital to be placed in trust, but there is an IHT liability. An insurance policy can be written to provide enough capital on the death(s) of the client(s) to cover the potential IHT liability. By writing the insurance plan in trust it does not form part of the estate for IHT calculations, but passes directly to the beneficiaries to enable them to pay the IHT liability. These insurance trusts are often run in conjunction with other trusts that provide the “income” to fund them.
