Home > Inheritance & Trusts > Which Type of Trust to Choose?

Which Type of Trust to Choose?

By: J.A.J Aaronson - Updated: 21 Nov 2012 | comments*Discuss
 
Trust Inheritance Tax Probate Avoidance

Trusts are a very useful legal instrument. They serve a number of purposes, with different types of trust being used in a variety of circumstances. Trusts are particularly useful for inheritance planning; some trust types are best suited to inheritance tax mitigation, while others are best used for probate avoidance or other estate planning purposes. It is vital that you choose the right trust type in order to ensure that it is compliant with the law and that your wishes are carried out.

Inheritance Tax planning

Mitigating an inheritance tax bill is one of the most frequently cited reasons for the establishment of a trust. The first thing to note is that, inevitably, the government wants your beneficiaries to pay inheritance tax and, as a result, the rules governing trusts established for the purpose of inheritance tax avoidance are relatively complex. However, it is perfectly possible to mitigate an inheritance tax liability through the use of a trust – and, crucially, perfectly legal.

A ‘testamentary trust’ is used to lower an inheritance tax bill. This type of trust allows individuals to make the best possible use of the inheritance tax allowance, known as the nil-rate band. This describes the amount that can be passed on before an inheritance tax liability arises; it is currently set at £312,000. When an individual dies, assets up to the value of the nil-rate band can be passed on to the surviving spouse, effectively increasing the latter’s nil-rate band allowance to £624,000. A discretionary trust can be used to separate assets from the ownership of the surviving spouse in the event that the value of the estate totals more than £624,000. They allow the surviving spouse some control over the assets (which is particularly useful if part of the property is the family home), while minimising the inheritance tax bill.

Probate avoidance

It is important to note that there is no ‘catch-all’ trust for all inheritance issues. Trusts are most commonly established for the purposes of inheritance tax avoidance, but many forward-thinking individuals also wish to find a way for their families to avoid the potentially lengthy and stressful process of probate.

Again, the basic principle in these circumstances is for the settlor (that is, the individual establishing the trust) to give up the legal title to their assets. It should be possible, however, for the settlor to retain some ‘benefit’ from the assets during their lifetime. As with testamentary trusts, this is useful if you wish to give up the legal title to your home but continue to live in it.

Living trusts, or ‘inter vivos’ trusts, are widely used for the avoidance of probate. These are established during the lifetime of the individual in question. The assets placed in trust are no longer considered to be part of the settlor’s estate, and are therefore not subject to the probate process.

It is worth remembering, however, that not all assets are subject to probate anyway. If you are survived by a spouse or other obvious descendant or dependent, your personal effects and some other assets will not be subject to probate.

Establishing a living or testamentary trust is complex, and must be properly executed in order to be effective. As such, you should always consider seeking professional advice.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Topics
Further Reading...
Our Most Popular...
Add to my Yahoo!
Add to Google
Stumble this
Add to Twitter
Add To Facebook
RSS feed
You should seek independent professional advice before acting upon any information on the InheritanceIssues website. Please read our Disclaimer.