Tax and Estate Planning

What is a Trust?
A Trust (sometimes called a Settlement) is the name given to a fund containing assets which have been ring-fenced for one or more particular persons. Trusts are governed by complex legal rules and regulations and also have their own tax régime. They can be created during the lifetime of an individual or in a Will when they will become operative from the death of the testator.

People's Experience of Trusts
Some people have had bad experiences of Trusts. In our experience problems arise relative to Trusts for one or other of the following reasons:

	The Trust in question has been drafted by a non-specialist lawyer and is not appropriate to the needs and requirements of the beneficiaries. Only an experienced and skilled practitioner should draft Trusts. He/she should certainly be a member of STEP (the Society of Trust and Estate Practitioners).
	The Trust provisions are rigid and cannot be changed. The fundamental principles of modern Trust drafting are that the Trust should be 'flexible'. The inclusion of flexible powers and provisions in a Trust will enable it to be adapted and altered to the changing circumstances of the beneficiaries and importantly also to changes in tax law.

Modern Flexible Trusts
Modern flexible Trusts confer discretionary powers upon the trustees as to the distribution of both capital and income. If these powers are present the Trust will be continuously tax-efficient (notwithstanding any changes to the tax laws). Cash can be distributed out of the Trust in a tax-efficient manner following guidelines deposited with the Will or Trust document. These distributions will be in accordance with guidelines laid down by the person who has created the Trust.

Foreign Trusts
Trusts are a product of the common law system on which English law is based. They are in wide-spread use throughout the United Kingdom and also in countries which were former English colonies. They are however an anathema to most countries on the European continent whose laws are based on the civil code. Care needs to be taken in transferring foreign assets into an English Trust.

The Role of Trusts in Estate Planning
Most estate planning (including Inheritance Tax avoidance) depends on the skilled use of Trusts (including especially Will Trusts).

Examples of how Trusts are used
Grandchildren - Grandparents often set up Trusts during their lifetime to provide funds for their grandchildren's education.

Provision for family on second marriage or Civil Partnership - It is common now for people to remarry or form another Civil Partnership and have 'a second family' with their new spouse or Civil Partner. Through using Trusts it is possible to provide for a new spouse and Civil Partner whilst also ring-fencing funds for the children from both the first and second marriage or Civil Partnership.

Tax planning vehicle - By putting assets into Trust either during a person's lifetime or on their death through their Will it is possible to reduce their potential Inheritance Tax liability. For example, in the case of a married couple or Civil Partnership it is possible to provide in their Wills for the amount of the nil rate band to pass to a Discretionary Trust. This can lead to a saving of up to £114,000 in Inheritance Tax whilst still ensuring that the surviving spouse or Civil Partner can benefit from the assets in the Trust.

It is also possible to place any Death in Service Benefits which may flow from a pension scheme membership and Life Policy Proceeds in to a Trust Fund. By placing these interests in a Trust you are ensuring that they do not form part of your estate on your death and will therefore not be subject to Inheritance Tax. As the benefits are often only paid out in the event of your death and you would therefore not benefit from them, this is a good way of reducing your Inheritance Tax bill.

However as a result of recent changes to the tax treatment of certain types of trusts great care needs to be taken when settling assets into lifetime trusts. Advice from a specialist trust and tax lawyer is needed. We can provide this advice.

For further information
Trusts can be complex and it is therefore essential that you obtain full advice as to the tax and other implications of creating a Trust both in your lifetime and on your death via your Will. We can provide a full service from the initial advice in connection with any Trust to the day to day administration of a Trust including the preparation of annual accounts and the submission of the necessary tax returns.

If you would like further information or to make an appointment to see one of our specialists please telephone Diane Blackshaw at our Lytham Office on 01253 736670, or choose one of the other contact options below.