Trusts can be used as a very effective way of protecting your hard-earned assets, particularly against the 5 most common threats to your estate (see below). 

Depending on your individual circumstances, they can help to minimise estate taxes and can offer many benefits when estate planning.  Your Will Writer will be able to help you decide whether a Trust may be beneficial to you, so you can take the appropriate steps when estate planning.

A Trust is a legal arrangement whereby a person or group of people is made responsible for looking after assets (e.g. money, property, investments) for the benefit of another person or group of people.

Trusts involve:

  1. The Settlor – the person putting their assets into the Trust
  2. The Trustee(s) – person(s) responsible for managing the assets in the Trust
  3. The Beneficiary/Beneficiaries – person(s) benefiting from the assets in the Trust

When you put assets into a Trust, you no longer own them (although you may still benefit from them) – this means that the assets may not count towards your inheritance tax bill when you die.

Did you know that when assets are distributed to your beneficiaries ‘absolutely’ (meaning they receive cash, property, or other assets as a direct lump-sum payment), there is a risk that some or all of these assets could be lost?  There are various ways this can happen, but here are 5 of the most common issues which could affect you:

1: Long-term care costs

Paying for social care is a real concern to many people living in the UK today – with life expectancy at older ages at its highest ever level (PHE report) and with 850,000 people living with dementia in the UK (The Alzheimer’s Society), the threat of having to pay for care costs in the future is a very real one.  For some families, their life savings will end up being virtually wiped out in order to fund these costs.

If you live alone and own your own home, you are generally at a much greater risk of having to sell your home to pay for care costs, as all your assets would be taken into consideration when assessing your ability to pay for long-term care.  At the present date, if you have assets worth £23,250 or more, and don’t share your home with an eligible party* you would be liable to fund all of your care costs, even if this means having to sell the family home to do so.

2: Divorce of a beneficiary

Let’s assume you leave £50,000 in your Will to your son James, who is married to Tina.  James uses the inheritance money to upgrade to a larger house, but a year down the line, he and Tina decide to divorce and sell the house.

This means that James and Tina will end up receiving £25,000 each from your estate, or to put it another way, half of James’ inheritance money has been lost through divorce.

3: Marriage after death

Many people leave their entire estate to their partner when they die, and those with children often assume the remainder of their estate will then pass to their children when their partner eventually dies.  However, should your partner remarry, everything you leave to them will become jointly owned with their new spouse.

This carries two risks: firstly, if the marriage breaks down, half of your hard-earned estate could end up being lost in a divorce settlement; secondly, if the new marriage succeeds but your partner passes away first, the whole of your estate could end up being inherited by this new family, whilst your own children are disinherited and receive nothing.

4: Bankruptcy or Creditors

Supposing you left your children a cash lump sum in your Will – perhaps the money would be used to start a new business, or used as a deposit on a new home?  However, have you ever wondered what would happen to the money if the business folded, or if one of your beneficiaries was experiencing financial problems and was running into debt?  There is a risk that their inheritance could be lost to creditors to pay off those debts, potentially wiping out the entire inheritance.

5: Inheritance tax

Whilst there is no inheritance tax to pay between married couples and civil partners, if your estate is valued above the Nil Rate Band (currently £325,000), inheritance tax may be payable on your death.  Inheritance tax is charged at 40% on your estate.

Many people don’t realise that the inheritance you leave can actually end up being taxed for generation after generation, for example, your children may have to pay 40% tax on your estate, the cash they inherit adds to their own estate, which is then taxed again when they die, and so on.

If you have no Will in place, or if you have made a simple Will/Mirror Wills, your assets could be at risk from these 5 threats.  The good news is that by the strategic use of Trusts, your assets can be protected from these threats, and your loved-ones can benefit completely from the inheritance you wish them to receive.

For advice on Trusts, and how they can protect you and your family when estate planning, contact Sarah Collier-Smith at Estuary Wills on 01702 746152.