A trust is an incredibly useful tool in estate planning, offering numerous benefits-one of the most significant being its ability to protect assets from potential risks. While the idea of a relatively straightforward setup providing such robust protection may seem too good to be true, it’s a proven and effective strategy. In this article, we’ll explore how a trust provides this protection, supported by real-life case studies to help illustrate its impact.
When assets are passed to beneficiaries, such as children or grandchildren, either during your lifetime (through careful life-time planning) or after your death (via a Will), they can face certain potential risks.
One significant risk is divorce. If a beneficiary, such as a child, goes through divorce proceedings, any assets given directly to them may be vulnerable and could potentially be claimed as part of the divorce settlement.
Another common risk is creditor claims or bankruptcy. If a beneficiary faces financial difficulties, the assets they receive could be at risk of being seized to settle debts or liabilities.
Trusts are designed to achieve two key objectives, and they do so by cleverly creating two distinct layers of ownership.
The first layer is beneficial ownership, which allows you to specify who the potential beneficiaries of the asset could be. This can include a broad class of beneficiaries, such as children or grandchildren, encompassing both existing family members and those who may be born in the future. While the trust is active, the named beneficiaries can enjoy the benefits of the asset as they are identified as its beneficial owners.
The second layer is legal ownership, which is retained by the trust itself. A trust operates as a separate legal entity, much like a limited company, which is distinct from its shareholders. This separation ensures that, while beneficiaries can enjoy the use and benefits of the asset, they do not hold legal ownership of it.
Trusts mitigate these risks by separating legal and beneficial ownership, ensuring that assets are protected while beneficiaries continue to enjoy their benefit
This structure is particularly advantageous in situations where a beneficiary may face financial or marital difficulties. Since the beneficiary does not legally own the asset, it is protected from claims arising from issues such as divorce proceedings or creditor disputes, offering robust protection and peace of mind.
Flexibility and control over assets are critical for ensuring the smooth functioning of legacy planning. A trust offers this flexibility by allowing you to appoint trustees who will manage the trust and oversee its assets. You can also designate substitute trustees, who step in if the original trustees are unable to fulfill their role, ensuring continuity.
The appointed trustees hold full authority over the trust, so their selection should be made thoughtfully. In many cases, depending on the type of trust, you can even serve as a trustee during your lifetime, allowing you to remain actively involved in managing the assets.
If changes to the trust’s assets are required, such as selling a buy-to-let property and purchasing another more suitable investment, the trustees can carry out these transactions within the trust. This ensures that the assets are managed effectively without disrupting the trust’s structure or purpose.
Looking ahead, decades into the future, if the trustees wish to retire and pass on their responsibilities, they have the authority to appoint new trustees. This ensures a seamless transfer of control to the next generation, maintaining the trust’s continuity and purpose over time.
By carefully selecting trustees, you can establish a planned and controlled handover of asset management, while also giving trustees the flexibility to make decisions that best serve the trust and its beneficiaries.
Case Study 1 – Trust in a Will
A couple, aged 55 and 52, owned a residential property and two buy-to-let properties with significant equity. They had two children-a 25-year-old son and a 22-year-old daughter-and wanted their children to inherit the properties after their passing.
To achieve this, the father included a provision in his Will to direct his assets into a trust upon his death. The trust named his wife as a trustee, alongside a professional trustee to assist in making decisions and provide guidance on managing the trust effectively. As the primary trustee, the wife retained full control over the assets, deciding how she and the two children could benefit from them.
The children were named as substitute trustees, ensuring continuity in case the wife could no longer serve in her role. After the wife’s passing, or if she predeceased her husband, the children would step into the role of trustees. The mother’s Will mirrored this arrangement, naming her husband as the initial trustee and later passing control to the children.
This structure allowed the trustees to manage the assets while ensuring the beneficiaries-namely the children-could enjoy the benefits distributed by the trustees. Importantly, the trust safeguarded the assets from risks such as creditor claims or divorce, providing long-term protection and stability for the family’s legacy.
This planning means the inheritance is both well directed and protected for the clients and their family.
Case Study 2 – Lifetime Trust for Inheritance Tax Planning
A married couple, aged 59 and 54, had written their Wills with a trust provision in 2019 but decided in 2020 to establish a lifetime trust to help mitigate inheritance tax. Their goal was to transfer a mortgage-free buy-to-let property worth £550,000, generating £1,750 per month in rental income, to their 21-year-old daughter while maintaining control and flexibility.
To achieve this, the couple created individual lifetime trusts, each transferring their respective share of the property into the trusts. They appointed themselves and their spouse as trustees, with a professional trustee to assist with legal and compliance matters. Their daughter was named as a substitute trustee, and the trust defined potential beneficiaries to include all current and future children and grandchildren.
After the property was legally transferred into the trusts, the clients, in their roles as trustees, allocated the rental income from the property to their daughter. She would continue to receive this income unless the trustees decided otherwise. This arrangement allowed the couple to retain full control over the property during their lifetimes, with the professional trustee ensuring the smooth execution of their decisions and compliance with legal requirements.
Following the passing of both clients, their daughter would be promoted to trustee and gain control of the trust while continuing to enjoy the benefits of the property. Importantly, should the daughter face a divorce in the future, the property would not be included in any settlement, as she is not its legal owner.
Additionally, transferring the property into the trusts started the seven-year clock for inheritance tax purposes. By 2027, the property would no longer form part of the couple’s estate, although a tapered portion would apply from years three to seven (2023–2027).
We checked with the clients in 2024 to see how the family is coping with the property having moved to the lifetime trusts. The clients commented that the process has been seamless, and they hardly notice any difference compared to when the property was in their personal names. Furthermore, they remarked that this approach was far better than the decision to transfer a property directly to their first child in 2018. In that case, they lost control of the asset, and it remains unprotected from potential divorce settlements. They are pleased with this trust-based solution we presented and are looking forward to 2027, when they can potentially transfer another property into a trust for their third child.
This strategy allowed the clients to achieve their objective of transferring the asset to their daughter during their lifetimes in an inheritance-tax-efficient manner, while ensuring adequate protection, control, and flexibility over the asset.
Don’t let the concept of trusts intimidate you-these are incredibly valuable tools that offer robust asset protection alongside a host of additional benefits.
Setting up and managing a trust is not as complicated as it might seem, and the costs involved are well worth the advantages they provide. With proper guidance and thoughtful planning, trusts can play a transformative role in your legacy planning.
At Nachu Finance, we recognise that every client’s circumstances and goals are unique. Whether it’s safeguarding assets, planning your legacy, or optimising inheritance tax efficiency, our advice is tailored to meet your specific needs.
We take a no-pressure approach, ensuring you feel comfortable and confident every step of the way. Our association with Countrywide Tax and Trust Corporation, experts in estate planning, further enhances the depth of our service. With extensive experience in property ownership processes, we’re uniquely positioned to guide you through effective solutions that align with your goals.
At Nachu Finance, we’re committed to making estate planning straightforward and stress-free. Let us guide you through the process with thoughtful, personalised estate planning strategies, so you can focus on what matters most-your family’s future.
