Many people think Discretionary Trusts, L and other forms of  Trust are a new invention, primarily devised by the tax fraternity to avoid paying inheritance tax. In fact trusts are of a much older heritage, having being around since the Middle Ages.

Knights and others involved in long campaigns on distance shores sought to protect and preserve their estates during their likely lengthy absences.

They would transfer the legal ownership of their estate to a third party.  This would often be a close friend, under an agreement whereby it was understood that ownership would be transferred back to the knight upon his return.

Thus the knight would TRUST his friend to manage his affairs in his absence and return them to him in good stead upon his return.

This transfer of legal title empowered the friend to manage the estate effectively and to enforce the rights of the estate against all parties while the knight was away.

            Even as far back is the Middle Ages trusts were used to protect assets and property from possible threats, although perhaps today’s threats are somewhat different.

  Today discretionary trusts can be a highly effective method of protecting your assets from care costs assessment and reducing the burden of probate cost on family inheritance, if implemented and used appropriately. In the correct circumstances they can also be used to help reduce your families inheritance liability.

Discretionary Trusts can also provide an excellent means of protecting assets against unreliable children or potential sideways disinheritance, due to divorce and remarriage.

Many people concerned about potential care costs consider transferring their property to their children.

By  making this transfer to their children the parent’s loose control over their assets, if the child falls out with the parents, goes bankrupt or is divorced the parents home could be lost.

By utilising a Lifetime Discretionary Trust you will also ensure the immediate Capital Gains Tax bill on the transfer of the parent’s property to the children will not become due, providing a significant saving.

A further saving would also be achieved by implementing a Lifetime Discretionary Trust in that if the property were transferred into the trust whilst remaining the parents’ principal private residence until their death no Capital Gains Tax will be due on any potential increase in value of the property over the period of transfer until death.

If the parents property and other assets are put into a Lifetime Discretionary Trust that is established and administered correctly then none of these problems need occur. If the parents change their mind the assets can simply be transferred back to them giving them total peace of mind.

An additional benefit of the Lifetime Discretionary trust is that if the children subsequently do not use the money and do not remove it from the trust it can be assigned to their children without further inheritance tax being paid

Wealthy individuals not concerned about protecting assets from potential care cost erosion should consider transferring cash or other assets into a Lifetime Discretionary Trust up to the value of the nil rate band every seven years. Discretionary trusts not only preserve flexibility over who gets what, and when, but they also offer significant Inheritance Tax benefits.

When assets have been transferred into the Lifetime Discretionary Trust they will be outside your taxable estate provided you survive seven years, avoiding a 40% Inheritance Tax charge on death. Tax benefits starts to accrue after two years, but the full relief is not realised until seven years and one day after the transfer into trust.   

The trust assets will remain outside the estate of any of the beneficiaries unless and until assets are actually transferred to them from the trust. That means the client can create a long-term flexible vehicle to hold family wealth with little or no IHT liability for anyone.

Each personal nil rate band allowance is replenished every seven years so you  could create a new trust every seven years. If you are  married, both spouses can use their own nil rate band, doubling the amounts that can be put into trust tax-free. As an example, if a husband and wife each transfer the full nil rate band into a discretionary trust every seven years then after just 21 years they will have taken at least £2.1m out of their taxable estate, potentially saving £840,000. The only tax cost will be modest ten-yearly Inheritance Tax charges. As the nil rate band increases, and assuming the value of the trust assets also increases, the overall tax saving could be far more than £840,000.

 Discretionary Trust provide a great means of reduce inheritance tax and potentially protecting cash and assets from allsorts of potential problems.  For a free consultation to see how using a lifetime discretionary trust could help protect your families wealth please call us on 0845 3700 240.

  Discretionary Trusts