We use cookies to deliver the best possible web experience. By continuing to use this site, you agree that we may store and access cookies on your device. You can change your preferences at any time on your browser. For more detail, click here to view our cookie policy.

Generic Links

Welcome to RL360's

dedicated financial adviser website

For financial advisers only

Not to be distributed to, or relied on by, retail clients

Trusts for all situations

Trusts have a wide variety of potential uses, and RL360's trusts cater for many of these needs.

In the December newsletter we looked at how wrapping a policy in trust can avoid the delays, costs and inconvenience of obtaining Manx Probate. However RL360's extensive trust range can offer other advantages in addition to those previously mentioned. Trusts have a wide variety of potential uses, and RL360's trusts cater for many of these needs. Furthermore clients have a choice of establishing their trust on a ‘Bare’ or ‘Flexible’ (Discretionary) basis.

Regardless of a client's domicile, when deciding between a Bare or Flexible basis, it is important to understand their reasons for establishing the trust. For example, does the client have specific beneficiaries in mind? A father may wish to leave his policy to his two daughters in equal shares and, should either of them die before him, he would want their respective estates to benefit. In this case a Bare trust may be suitable, where specific individuals are named as beneficiaries and cannot be changed in the future. Alternatively, a grandfather may want his policy to benefit both present and any future grandchildren. In this scenario flexibility is king, and this can only be achieved by establishing a discretionary trust.

There are also Inheritance Tax (IHT) implications to consider. Clearly this subject is of no concern for those clients who are not UK domiciled, but it will be for those who are. A client who has been living abroad for many years may still be UK domiciled, and will definitely be so if it is their stated intention to retire in the UK. It is therefore important to arrange the client's affairs so that any future IHT liabilities are minimised.

Every UK domiciled person has an available nil rate band for IHT purposes - in the current tax year of 2009/2010, this is £325,000. When a Bare Trust is established, this is treated as a potentially exempt transfer; only if the client dies within seven years of establishing the trust will the amount of the gift have any effect on his or her nil rate band. However, if a Flexible Trust is created, this is a chargeable transfer; if the gift is within their available nil rate band, there is no immediate charge to IHT. On the other hand, if the amount of the gift exceeds the available nil rate band, an IHT charge of 20% on the excess will be applicable.

This places a limitation on the amount of the gift which can be made without triggering a charge. A way around this would be for the client to simply create a discretionary trust within the nil rate band every seven years, because after this, a chargeable transfer drops out of an individual's cumulation period.

When considering IHT planning, clients need to give consideration as to whether or not they can afford to make an outright gift of their capital. For example, if a client establishes a Gift Trust, he will not be able to benefit from that trust. One of the advantages of establishing a Gift Trust on a discretionary basis is where a client may wish to gift his policy to his young children. The client may realise that if he simply left his policy to the children in his will, upon reaching the age of majority they would be able to access the money, at a time of financial immaturity. This would also apply if the money was left in a Bare Trust because the beneficiaries are also entitled to the trust fund at the age of 18.

The client may wish to establish a trust on a discretionary basis and provide guidance to the trustees during their administration of the trust using a Letter of Wishes. It could be stipulated that the children do not receive their share of the capital until they have attained the age of 30. The client could specify that he would wish funds to be used to school his children in the interim, thus ensuring they receive the best possible education and are more likely to be financially mature at the time of distribution.

It may be that an individual wishes to maintain access to their capital but can afford to gift any growth on it; in this case they may wish to consider establishing a Loan Trust. Although not a beneficiary of the trust, the client would be entitled to flexible repayments of the loan. The outstanding loan will be in their estate for IHT purposes, but any growth on the value of the initial investment is immediately outside of their estate.

Finally, for those who may wish to be looking for an immediate reduction in IHT and who are in good health, our Discounted Gift Trust may be suitable. This trust allows the client access to pre-determined capital payments from it. Although the client would not be a beneficiary of the trust, its terms allow him to carve out a right to capital sums payable on, and contingent only upon, surviving to each successive anniversary date of the trust. The value of the amount gifted is therefore reduced because the amount of the transfer equals the gift less the value of the contingent interest.

Finally, for a non-UK domiciled individual, the International Flexible Trust can be used as an ‘Excluded Property Trust’, assuming of course that the underlying asset/s is a non-UK asset. This will mean that if the client is considering moving to the UK and settling there for the remainder of their life, they may at some point in the future become deemed ‘UK domiciled’, and their worldwide assets at this point will be liable to UK Inheritance Tax. As long as they settle their non-UK based assets into an excluded property trust prior to becoming deemed UK domiciled, their assets should always remain out of the reach of UK Inheritance Tax.

Where trusts are involved, it can safely be said that one size never fits all.