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Inheritance tax guide: what is a trust and how does it work?
Following our guide on avoiding inheritance tax, we look at the trusts that can be set up and how they can benefit you and your family.
by Michelle McGagh on May 17, 2012 at 10:03
Keeping your estate out of the clutches of HM Revenue & Customs (HMRC) when you die isn't easy, but setting up a trust could mean your money goes to your loved ones, not the taxman.
What is a trust?
A trust is a legal contract through which ‘trustees’ are given legal responsibility for holding on to certain assets such as land, money, buildings or share portfolios. Other items such as antiques, paintings, furniture and jewellery can also be placed in trust, sometimes known as ‘chattels’.
The ‘settlor’ – the person who has set up the trust and owns the assets within it – can tell the trustees what to do with the assets and also has control over who should benefit from the trust, known as the ‘beneficiaries’.
More about trustees
Trustees have the task not only of undertaking the wishes of the settlor but also of managing the trust on a day-to-day basis, paying tax that is due, and deciding how the assets should be invested.
There are usually two trustees: a professional such as a lawyer and a family member.
More about beneficiaries
Beneficiaries receive some benefit from the trust. They might benefit from the income from investments or property lets or they may benefit from the capital, such as a portfolio of shares they receive at a certain age. They could also benefit from the income and capital in the trust.
More about settlors
Settlors are people who set up the trust and put assets into the trust – known as ‘settling’ property. Although assets are usually added to the trust when it is set up, you can also add assets at a later date.
Settlors have control over what happens to the assets in the trust and they direct the trustees. They can, through some trusts, also be a beneficiary of the trust.
Why would I need one?
Trusts are set up for a variety of reasons, but usually to safeguard family money either from tax, or from other family members!
More about this:
More from us
- How to avoid inheritance tax
- Why you need to write a will
- Lasting power of attorney: how you can safeguard your future
- Sloppy will-writers should soon be regulated
- Watch out for unregulated legal services: you have no protection
- Citywire Adviser Finder tool
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