Trusts and Tax Planning Checklist

Categories: Divorce, Family Law, Wills and Probate

Michael Coyle
October 21, 2024

Hi I am 50, married with two small children. Can you send me a checklist for my consideration?

1. Set Up a Trust

Type of Trust: Decide which type of trust suits your needs:
- Bare Trusts: Assets are held in the name of a trustee but belong to the beneficiary. Typically used for minors.
- Discretionary Trusts: Trustees decide how to distribute income or assets to beneficiaries, offering more flexibility.
- Interest in Possession Trusts: Beneficiaries have the right to income from the trust, but the capital can go to other beneficiaries later.
Appoint Trustees: Select trustworthy individuals to manage the trust responsibly.
Define Beneficiaries: Clearly outline who will benefit from the trust, including any contingencies for unforeseen events.

2. Consider Inheritance Tax (IHT) Implications

Annual Gift Exemption: You can gift up to £3,000 each year free from IHT.
Potentially Exempt Transfers (PETs): Gifts that are free of IHT if you survive for 7 years. Consider making larger gifts to reduce the taxable estate.
Nil-Rate Band: Ensure that your estate makes full use of the £325,000 nil-rate band for IHT, and potentially the Residence Nil-Rate Band (RNRB) if passing on a family home to direct descendants.

3. Utilise Trusts for IHT Efficiency

Discretionary Trusts: Can help reduce IHT exposure, as assets in the trust are generally not part of your estate for tax purposes.
7-Year Rule: For trusts like Discretionary Trusts, if you survive 7 years after transferring assets into the trust, they will generally be excluded from your estate for IHT purposes.

4. Plan for Income Tax

Trust Income: Trusts may be subject to income tax. For example, discretionary trusts pay income tax at a higher rate. Plan for this if the trust generates income.
Personal Allowances: Ensure your trust planning aligns with the use of your personal income tax allowances, including any for your spouse.

5. Plan for Capital Gains Tax (CGT)

Trust CGT: Trusts may be subject to CGT on any gain when assets are sold. The trust has its own CGT annual exemption (£6,150 for 2023/24).
Holdover Relief: Consider whether holdover relief is available when transferring assets into a trust, which can defer CGT until assets are sold.

6. Use Life Insurance Policies

Set up a life insurance policy within a trust to cover potential IHT liabilities. The payout will be excluded from your estate and can provide liquidity to pay IHT.

7. Review Your Will and Estate Plan

Update your will to reflect any changes in your family or financial situation and ensure that it aligns with your trust and tax planning.
Ensure that guardianship for your children is mentioned in case of early demise.

Info@lawdit.co.uk

Lawdit Solicitors

www.lawdit.co.uk

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Written By:

Michael Coyle

Michael is Lawdit’s Principal and heads our Commercial and Intellectual Property Department. As a Solicitor Advocate, he is one of a select group of legal experts qualified to represent clients as an advocate in the Higher Courts in England and Wales. He holds a Master of Laws degree (LL.M) from Nottingham Trent University and is a guest lecturer at Southampton Solent University. He has also completed a teaching stint at the Academy of Music in Guildford where Michael taught copyright law. Michael is highly regarded for his work in all areas of intellectual property law (which includes the eCommerce and IT fields), litigation and company/commercial matters. He regularly advises on non-contentious issues including regulatory and statutory obligations and has been involved in many successful disputes, with a strong reputation for finding common sense and practical solutions for clients. In 2017, Michael was awarded the honorary degree of Doctor of Law from Southampton Solent University for his contribution to the University and his continued support to its students.