The use of trusts has become increasingly popular, as incomes and assets values have risen over the last decade.

A trust can be created during your lifetime or through a will to take effect on death. Trusts are created for a variety of reasons; however, some the more common ones are:

• To move money outside your estate and potentially reduce your Inheritance Tax (IHT) liability.
• To preserve assets for the next generation (and beyond) while maintaining some control.
• To provide for a family member who may not be able to life independently in the future.\
• To protect family wealth from risks surrounding bankruptcy, divorce, or financial mismanagement.
• To receive life insurance benefits outside your estate and avoid increasing your IHT liability further.

Depending on what you would like to achieve, there are a number of trust types which could suit your circumstances.

Trusts Explained

There are three main ‘parties’ to a trust:

• The settlor is the person setting up and funding the trust. Trusts can also be set up by couples as joint settlers.
• The trustees are responsible for managing the trust and distributing income and capital. Settlors are usually trustees, although it is sensible to appoint at least one other person. You can also appoint professional trustees if required.
• The beneficiaries are the individuals who will eventually benefit from the trust. The beneficiaries may be specific people (for example, your children in set proportions) or appointed from a class of potential beneficiaries (e.g., your children and grandchildren). 

In general, trusts fall into three main categories:

• Bare (or ‘absolute’) trusts set aside assets on an absolute basis for one or more beneficiaries. The proportions cannot be changed later.
• Discretionary trusts provide flexibility for trustees to distribute income or capital to beneficiaries from a selected class.
• Interest in Possession trusts provide a lifetime income (or use of an asset) to one beneficiary (the life tenant) and designate the capital to one or more ‘remaindermen’ on the death of the life tenant. For example, this could allow a surviving spouse the use of the family home for their lifetime, with it subsequently passing to the children. 

Trusts can be sub-divided further, depending on how much flexibility is required versus tax efficiency. Any of the following trusts can be either bare or discretionary:

• Gift trusts which are created by a gift of capital.
• Gift and loan trusts which include a gift element as well as a loan which can be reclaimed (or written off) by the settlor at any time. This allows investment growth to accumulate outside the estate while allowing the settlor access to their money if needed.
• Discounted gift trusts provide the settlor with an annual income and an immediate reduction to their estate.
• Life insurance trusts do not have any value at outset but can receive insurance policy benefits. This allows the payout to bypass the estate and probate procedures and avoid IHT. 

The trust types vary in terms of flexibility and tax efficiency, and sometimes a combination of approaches can work best. 

Setting Up a Trust
You can set up a trust via a solicitor. The trust can either take effect immediately or on your death via a will trust.

Alternatively, if you are setting up a life policy or investing in an investment bond, the insurance company will normally have a range of trust deeds available. 

Many trusts use investment bonds as the vehicle for the trust assets, as they are fairly simple to administer and only become taxable if a chargeable event occurs, e.g., encashing the bond at a profit. If you already hold an investment bond, you can assign it (fully or partially) into trust without an immediate tax liability. 

Cash, property, shares, and investment accounts can also be held in trust, but the taxation is significantly more complicated.

Risks of Trust Planning
Some potential risks of setting up a trust include:

• Complexity – trust rules can be difficult to understand, and it is easy to get it wrong.
• Inflexibility – once a trust is set up, it can be difficult (or even impossible) to unwind, even if your circumstances change.
• Reliance on others – it is vital that the trustees can be trusted to carry out your wishes and follow the provisions of the trust. Even with good intentions, a trustee might make poor decisions or bad investment choices.
• Taxation – discretionary trusts in particular can be taxed more heavily than personal investments. The tax treatment of trusts is significantly more complicated. 

Other Options
Depending on what you would like to achieve, you may want to consider some other options, either instead of, or alongside trust planning. For example:

• Making outright gifts. This is a simpler option, although involves giving up full control of the money.
• If your priority is setting aside money for your children or grandchildren, you can pay into a savings policy for them. If a grandparent makes a contribution of under €3,000, it will not be taxed for inheritance tax purposes, as it will be below the annual gift exemption threshold.
• If you are unsure about making gifts, either directly or into trust, a whole of life insurance policy (paid into trust) can provide a ring-fenced sum to your beneficiaries on your death.
• Another option for reducing inheritance tax is to qualify for Business Reliefs, for example, retirement relief and/or revised entrepreneur relief.

Estate planning is a complex area and requires a holistic view of your circumstances and what you would like to achieve. It can be a years-long process rather than a single transaction. Please feel free to contact me if you would like to find out more about estate planning.