Don’t overlook trusts, they could be a useful way to pass on wealth

Trusts may be a useful way to pass on wealth, but research suggests it’s an option some people are dismissing.

You can place a variety of assets in a trust, from investment to property, for the benefit of another person, known as the “beneficiary”. The trust is then managed by one or more trustees according to the instructions you’ve set out.

There are many reasons why using a trust to pass on wealth to your loved ones could be right for you. Among them are:

  • Ensuring your assets are passed to the right person
  • Reducing a potential Inheritance Tax (IHT) bill
  • Passing on assets more efficiently
  • Allowing you greater control over how the assets are used
  • Creating a legacy for future generations
  • Decreasing the risk of assets leaving your family.

Yet, despite seeking advice, research suggests many people who could benefit from using a trust aren’t doing so.

The majority of life insurance is not placed in a trust despite the advantages

According to Royal London, families are frequently recommended trusts by financial planners. Yet, few are following the advice offered.

For instance, just 3 in 10 people with a term life insurance policy have placed it in a trust. Life insurance would pay out a lump sum to your beneficiary if you passed away during the term.

Writing your life insurance in trust can ensure the payout goes to the right person.

A life insurance payout that’s not placed in a trust could also be included in your estate for IHT purposes. So, it could inadvertently lead to an IHT bill that you’ve not considered.

In addition, by placing a life insurance policy in a trust, the money paid out wouldn’t need to go through the probate process. As a result, your family could receive the money much quicker. This could be particularly important if your loved ones rely on your income to cover daily expenses.

In contrast, the survey found simpler alternatives are far more likely to be followed, which could suggest part of the reason families are overlooking trusts is because they don’t understand them.

4 questions to answer if you’re thinking about setting up a trust

1. Why are you considering a trust?

There are several different types of trust. Which option may be right for you will depend on your goals.

A trust that holds assets for a grandchild until they’re an adult would be very different to a trust that’s designed to provide a regular income for future generations. So, setting out why you think a trust could be right for you is useful – it could help you identify which type of trust could be used and if there are any alternative solutions you may want to consider.

2. Do you want to benefit from the assets held in the trust during your lifetime?

In some cases, you might want to benefit from the assets you place in a trust during your lifetime. For instance, you may receive an income from investments held in a trust, which will be inherited by your children when you pass away.

Doing this could reduce a future IHT bill, but there are other benefits too. It could provide security in the future if you were unable to manage your assets or finances, as the trustee would be responsible for doing this according to the terms of the trust.

It’s important to be clear if you want to continue using the assets as it may affect the type of trust that’s right for you and how it’s set up.

3. Who will be your beneficiaries?

Setting out who would be the beneficiary of the trust may be important when you’re deciding which assets you’d like to pass on.

Your beneficiaries may also affect the terms of the trust. For some people, you may be happy for them to access the assets, while for others you may want the trust to provide a regular income instead.

4. Who will act as trustee?

Trustees are responsible for managing the trust in line with your instructions.

You can choose someone you know personally, such as a close friend or family member, or a professional trustee, like a solicitor, which would come with a cost.

If you decide to ask a relative or friend to act as a trustee, it’s a good idea to speak to them first. Ensuring they understand what their duties would entail and your wishes can help them decide if it’s a responsibility they want.

Seeking professional help is often advisable if you want to set up a trust

Once a trust is set up and assets are transferred, it can be difficult, and, in some cases, impossible, to reverse the decision. So, seeking professional support is often advisable.

As financial planners, we can help you understand which assets to place in trust to meet your goals and the effect it could have on your wealth. It can give you confidence in the steps you’re taking.

Legal advice may also be valuable. Depending on your needs, setting up a trust can be complicated and a solicitor could help you avoid potentially costly mistakes.

Contact us to discuss if a trust could help you pass on your wealth

Trusts can be useful in a variety of scenarios but it can be difficult to understand if they’re right for you and the steps you need to take to use them effectively. We can provide advice tailored to your circumstances to help you create an estate plan that aligns with your wishes, including setting up a trust if it’s appropriate.

Please get in touch to arrange a meeting to discuss your estate plan.

Please note:

This blog is for general information only and does not constitute financial advice. The information is aimed at retail clients only. Professional advice should be sought for your specific circumstances.

The Financial Conduct Authority does not regulate trusts, estate planning, tax planning, or legal services.