Trusts are a historic concept, dating back to the 12thCentury. A Trust is the formal transfer of assets (it may be property, shares or just cash) to a small group of people or to a Trust company with instructions that they hold the assets for the benefit of the intended beneficiaries.
For most people a Trust is established to arrange the family’s financial affairs.
The main attraction is the confidence it gives the creator (Settlor) of the Trust in how assets will be allocated and used in the future
Essentially a Trust offers a method of holding and managing property and/or money for beneficiaries whom are not ready to manage it for themselves, including future generations.
Assets in a bare Trust are held in the name of a trustee. The beneficiary, however, has the right to all of the capital and income of the Trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.
Bare Trusts are often used to pass assets to young people – the trustees look after them until the beneficiary has reached a designated age.
You leave your brother some money in your Will. The money is held in Trust.
Your brother is entitled to the money and any income (for example interest) it earns. He can also take possession of any of the money at the relevant time.
Interest in Possession Trusts
This type of Trust operates where the trustee must pass on all trust income to the beneficiary as it arises (less any reasonable and properly incurred expenses).
You create a Trust for all the shares you own.
The conditions of the trust say that when you die, the income from those shares go to your wife for the rest of her life. When she dies, the shares will pass to your children.
Your wife is the income beneficiary and has an ‘interest in possession’ in the trust. She does not have a right to the shares themselves.
Immediate Post Death Interest Trust (IPDIT)
An IPDIT allows you to leave your spouse, or civil partner, the right of occupation of your property as a ‘life tenant’, and/or the benefit of the income from your investments, without them actually owning the assets underlying capital value, thus protecting the capital for your intended beneficiary, known as the ‘remainderman’.
An IPDIT is very useful in second marriages, where your wish is to ring fence the capital assets of your estate for the children of your first marriage.
An example, where a husband and wife whom have both been married previously and each have children from their first marriage, jointly own a property. To ensure that their individual half share of the property passes to their respective children, mirror Wills are written for husband and wife making use of an IPDIT.
A Trust is then created under the Will of the first to die which does not actually terminate until the death of spouse or civil partner ‘the life tenant’, unless however, clauses are added identifying triggering events which would bring the IPDIT to an end, such as a re-marriage or the life tenant ceasing to occupy the property.
There are inheritance tax implications if the life tenant continues to benefit from the IPDIT assets until they die. On their death the underlying capital values are added to the value of their estate for the purposes of Inheritance Tax (“IHT”) however you are able to utilise the transferable IHT exemption allowance (known as the “nil rate sum”) from the first to die, to offset the IHT liability on the second estate.
An example, in the event you leave all of your estate to your spouse or civil partner for life and thereafter to your children and you have your own nil rate sum available to transfer, also if there is a property with a residential nil rate sum available, then these reliefs can be applied for IHT purposes against the value of the estate in order to reduce the IHT liability.
In addition, in the event either of the married couple has been widowed from their first marriage, then they may also make use of their first spouse’s nil rate sum, if it is still available
This is a very specialist area and drafting needs to accurately reflect the Settlors’ situations and their wishes in order to prevent administration and IHT issues arising in the future.