Time to trust in Trusts?

Trusts are a legal arrangement for managing assets. Steeped in history, they were developed within the concepts and principles of equity, used as a mechanism to correct the strictness of the common law, and to produce an outcome that was fair, just, or equitable.

Despite their long history, and their wide-ranging uses, trusts do not appear to be a hugely popular tool – many members of the public have little grasp or knowledge of trusts; many practitioners find them complex and onerous and, if the tax and administrative regime is anything to go by, the Government isn’t keen on trusts either!

From the charitable perspective, we see numerous trusts, created both in lifetime and by Will. They can provide some very useful flexibility, or security, by protecting assets, ensuring wishes are met, and providing tax efficiency – here are a few thoughts…

The best of both worlds – life interest trusts

In the modern world of multiple marriages, and what are often known as “blended families”, the life interest trust contained in a Will can be a key tool to provide for what at first may appear to be competing interests.

The tricky balance between providing a home for, say, a second spouse, while also providing financially for the children of a first marriage, can often be met with the use of a life interest trust. Whether the asset is a pecuniary sum, an investment portfolio, or a share (or all) of a home, the trust created on death can afford the surviving spouse an interest for the remainder of their lifetime while, ultimately, providing the asset for the children.

Appropriate thought should be given to any terms for advancement of capital, or protection of the property during the period of the trust e.g. who is responsible for insurance, maintenance, payment of outgoings, and what about the chattels, do they pass absolutely to the life tenant or into the trust?

Trusts like this are common in our world of charity legacies too, where the life interest in the asset is provided for the benefit of the spouse, children or other family or friends, but then, very generously, the asset passes to our charity at the end of the trust period. For the charity supporter, again, a tricky balance can be achieved in this way.

Care fees and trusts

The current care fee regime and the rules on deliberate deprivation of assets are a significant legal area of their own, and this is not intended to be a legal commentary.

However, we are aware that many practitioners are approached by clients who want advice on this topic and the options proposed often seem to include the use of trusts – whether a severance of a joint tenancy linked with a life interest trust in the Wills, or the creation of a lifetime trust with the transfer of assets – particularly the family home - during lifetime.

It is fair to say that over at least the last 10 years there has been significant uncertainty in relation to the care fee regime. It is a political “hot potato” which along the way has seen the Dilnot Report, the Care Bill 2013, and the implementation of some parts of the subsequent Care Act 2014, while others were cast to the long grass.

Even in the last few months, we have seen an increase in National Insurance contributions to provide additional funding for care, but then we have seen that reversed. Who knows what lies ahead, but we suspect that, at least in the short term, practitioners will continue to receive enquiries about this topic.

From the charity perspective, our plea would be to remember charitable giving in conversations around use of trusts – where charitable gifts are commonly discussed now in conversations around Wills, it is less clear if they are considered upon creating lifetime trusts which, after all, may be geared around a disposal of the most significant family asset.

Tax planning

Lifetime trusts can also be a very useful means of mitigating the potential Inheritance Tax liability on death, by reducing the value of a person’s estate during their lifetime. Using a trust, rather than an outright gift, allows a degree of control to be retained by setting parameters or giving an expression of wishes to the Trustees.

Careful consideration needs to be given on a wide array of factors - reflecting on the Nil Rate Band available at the point of transfer; the impact of the 7-year rule applying to Potentially Exempt Transfers; the potential consequences of a transfer into trust on the Residential Nil Rate Band; the reservation of benefit provisions… – it can be a minefield, but judicious planning can reduce the value of the estate on death and therefore reduce the tax liability.

Again, charities would ask practitioners to remember charitable giving in conversations around tax planning, lifetime giving and lifetime trusts.

The trust bust

Where a trust has already been created and is in operation, there are ways to bring about an early conclusion if that might be beneficial. We know this as a “trust bust”, or a partition, or variation.  This is quite common where there are, say, financial assets invested through a life interest trust, to produce an income for the life tenant for their lifetime, and then for the capital to pass to our charity.

With the low interest rates which we have seen over the last few years (admittedly now rising) and volatility in the markets, the income generation aspect has perhaps been quite weak and has given rise to some requests to conclude the life interest trust early. We will always fully consider a request on that basis, often obtaining an actuarial report to ensure a fair division between the life tenant and the charity.

With the administrative burden, and additional expense, involved in the Trust Registration Service, and who knows what tax changes may lie ahead, a trust partition or “bust” may be an attractive solution. Please do contact us if you have a trust where we have a reversionary interest, and you would like to discuss this in more detail.

In conclusion

In the charity, legacy sector, we are quite familiar with the use of trusts for a variety of reasons, and we see the solutions they provide to otherwise tricky problems.

If you are discussing a trust with your clients then do feel free to reach out to our team if we may be involved at some point, and you would like to discuss the practicalities of how a trust will impact upon our charity, or for any other reason where we can help.

Together we will beat cancer.

Rod Etherington, Legacy Management Specialist