Trusts for Inheritance & Tax Planning

Trusts for Inheritance & Tax Planning

What is Trust for?

A trust is an ethical arrangement that allows a third party, known as a trustee, to hold assets on behalf of a beneficiary or beneficiaries that you nominate. Trusts can be arranged in many ways and can specify exactly how and when your assets gets passed on to the beneficiaries, such as your partner(s) and children.

Since trusts usually avoid probate (court), your beneficiaries may gain access to your assets more quickly on death than they might through using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.


Trust Example

Client moves $500,000 of his money into a trust to be passed on to his partner/children on death for tax efficiency and avoid court seizure of his assets through divorce or other legal proceedings.

Why Set Up a Trust?

Avoids Court: The primary purpose of a trust is to avoid the expense and delay of the probate process, i.e. so that on death, your named partner(s) and beneficiaries receive what they want without going through years of court battles

Privacy: After your death, your will is likely to be probated. In this case, your will becomes a public document, along with the value of the assets that formed your estate. Further, certain people may be entitled by law to receive a copy of your will. A trust agreement, however, is a private document and can keeps information confidential. Some people replace their wills with a trust

Avoids Compulsory Inheritance: in some countries, a will automatically gives your assets away to particular family members (many former French colonies do this) Controls Distributions: you control who gets what on death, when and how those assets are delivered

Why Set Up a Trust?

Protects Your Legacy: A trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management

Tax Reduction or Avoidance: the right type of trust can avoid large inheritance / estate taxes on death

Protects Your Family from Themselves: by putting your assets into a trust, you can decide when and where beneficiaries can access the wealth in a trust. Often this means children not being able to access a trust until later in life when they have become more responsible

Educate Your Heirs: Set up a university trust fund for your children or grandchildren

Charities: Set up a “foundation” to give to poor children and those less fortunate than yourself. This can be set up to give a lump sum on death as well as install regular payments

Types of Trust

There are many types of trust, so we won’t go into detail here as it requires lengthy discussions with clients. But, here are the main types…

Revocable Trust (faces tax on death, but you have control):

Revocable Trust

Also known as a living trust, a revocable trust can help move your assets outside of probate (court), whilst allowing you to retain control of your assets during your (the grantor’s) lifetime. It is flexible and can be dissolved at any time should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor (you).

You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but you will need to make provisions for a successor trustee to manage them in the event of your incapacity or death. Although a revocable trust may help avoid probate, it is usually still subject to inheritance or estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable Trust (usually avoids tax on death, but control is relinquished)

An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of inheritance or estate taxes and probate (court), but cannot be altered by the grantor (you) after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.

An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences).

It may also be protected in the event of a legal judgment against you.

Pension Trusts

Depending on your nationality, we can either set up new pension trusts where you funnel new money into a pension or we can transfer existing pension monies abroad for tax reduction, currency control, investment control and retirement planning.

British expats can transfer their existing UK tax-relieved pension schemes to a QROPS to avoid tax on death, collate all their pensions to one easily manageable place and perhaps reduce or eliminate income tax. Irish expats and Dutch expats can also transfer.

Brits living abroad can set up a new pension scheme with new monies under a QNUPS to protect their pensions from tax on death. This may be relevant if you have built up a pension scheme offshore in somewhere like Guernsey or Jersey, but may still face a UK tax bill on death.

We have solutions for British expats, Dutch, Irish, Americans, Australians, South Africans and many other expats.