Why create a trust?
People establish trusts for various reasons, mainly focusing on wealth management, asset protection, and succession planning purposes. In this article, we outline the main benefits to setting up a trust.
Asset protection
Having a trust in place can offer a number of asset protection advantages, including:
- Shielding assets from creditors, legal claims, and divorce settlements: Assets held within a trust are generally not considered part of the individual’s personal estate, offering protection from potential lawsuits or financial difficulties faced by a beneficiary, such as during divorce proceedings or bankruptcy.
- Protecting vulnerable beneficiaries: Trusts can be crucial for individuals who are too young to manage large sums of money, or who may have mental incapacity. A trust allows you to appoint trustees to manage and distribute assets responsibly for their benefit, according to the terms you set.
Estate planning and control
Trusts can also be a helpful tool for estate planning purposes in the following ways:
- Controlling distribution: Trusts offer unparalleled control over how and when assets are passed on to beneficiaries. You can specify staggered payments, set conditions for distributions (e.g., reaching a certain age or achieving a milestone), or even ensure assets are used for a specific purpose like education.
- Maintaining control over assets while alive: You can serve as a trustee during your lifetime, actively managing the assets held within the trust, even though you are no longer the legal owner. This allows you to retain influence over how the assets are managed and distributed while still alive.
- Succession planning for family wealth: Trusts are a robust tool for ensuring wealth is passed down through generations in a controlled and structured manner, aligning with your long-term family goals.
- Flexibility: There are many types of trusts, and they can be customised to suit a wide variety of personal and family circumstances and financial goals.
Tax advantages
Trusts can offer a number of tax advantages to both the settlor and the beneficiaries. Notably, they offer:
- Potential to reduce inheritance tax: Certain types of trusts can help lower your taxable estate, potentially reducing or eliminating the inheritance tax liability, if assets are placed into trust more than seven years before your death.
- Tax-efficient income distribution: In some cases, trusts can be used to distribute income to beneficiaries with lower tax rates, potentially reducing the overall tax burden.
Other benefits
Certain trusts can offer a number of other advantages, to include:
- Protecting against care home fees: Depending on the specific rules and structure of the trust, and provided the primary reason for setting up the trust wasn’t to avoid care fees, placing assets into a trust may protect them from being included in means-tested assessments for long-term care costs.
- Supporting charitable causes: Charitable trusts offer a structured and tax-advantaged way to support causes close to your heart.
In summary, establishing a trust can offer greater control, asset protection, and tax advantages. It is crucial to consult with legal advisors to determine the most suitable type of trust for your specific needs and to ensure it is established and managed correctly.