A family trust allows you to transfer assets to trustees who then have the responsibility for looking after them until they can be passed on to your beneficiaries. This makes them particularly useful for keeping assets safe until a child or grandchild is old enough to inherit.

Family trusts are also sometimes referred to as life protection trusts, spouse protection trusts and wealth protection trusts.

Setting up a family trust is one way in which you can put in place the necessary protections for your assets. However, the law relating to the protection of assets is complex and can involve several facets of the legal and taxation systems. Our team of lawyers can guide you through these complexities and advise you on any steps you can take to ensure your assets are protected, now and in the future.

In practice, a trust is a legal arrangement whereby the person creating the trust (“the Settlor”) gives control of a portion of their assets (“the Trust Fund”) to a person or an institution (“the Trustees”) for the benefit of others (“the Beneficiaries”). 

Using a trust can assist in ensuring that your wealth does not come under threat from elements such as:

• Inheritance Tax
• Capital Gains Tax
• Care costs
• Business failure
• Forced inheritance, such as a child’s legal right or a cohabitant’s claim
• Family or matrimonial issues

The most common type of family trust is a Discretionary Trust. This type of trust gives the Trustees absolute discretion to distribute capital and income amongst a predetermined class of beneficiaries. No one Beneficiary has any right to the Trust Fund but is merely a person the Trustees may choose to benefit. The Trustees are guided by your wishes as set out in a separate “Letter of Wishes”. 

Other types of trust include:

• Bare trust or “Fixed Trust” - Beneficiaries are entitled to a set amount of wealth.  
• Life interest or “interest in possession” trust – Beneficiaries are entitled to any income produced by the trust (such as interest, dividends or rental income) or to live in a property until they die and then the Trust Fund is passed on in accordance with further provisions (often falling into a Discretionary Trust at this point).

Trustees have complete control of the Trust Fund. There must be a minimum of two trustees and any decisions made must be unanimous. The Settlor can be a Trustee, and therefore retain an element of control over the Trust Fund. Other Trustees can include your children, partner, other family members and friends, professionals, or a mixture of these people. As the Settlor, you have the choice of who to appoint as Trustees and JMW can help you decide who might be most appropriate to choose in your circumstances.

Any family members can benefit from a trust. You can also choose to add, or remove, beneficiaries of the trust after it has been established.

Assets such as property, investments and cash can all be protected in a family trust. If you wish to place assets valued in excess of your available IHT threshold (also known as the nil rate band) within the trust, this would normally create an immediate charge to lifetime IHT. The current threshold is £325,000, and any value that exceeds this will be taxed at a standard rate of 20%.

There are some exceptions to this, particularly where your assets qualify for business property relief (such as shares in a business). For further information, please visit our Business Protection page.

A life insurance policy or pension lump sum can be a significant asset, and if payable to your estate could result in a large and undesirable Inheritance Tax bill for your estate.  If you want to protect your beneficiaries from Inheritance Tax, you may wish to consider placing your life insurance or pension lump sum into a trust.

At JMW, our experienced team of lawyers has the depth of knowledge to guide you through the process of setting up a life assurance or pension trust. In doing so, we can help you to ensure your beneficiaries receive the money you intend to leave them. The benefits of doing this are a reduction in IHT and flexibility and protection of assets.