Trusts: When Might You Choose to Establish One?

November 5, 2023

Here at Greensky Wealth, we’ve been working closely with other professionals to make sure we offer our customers a full range of legal and financial support. We’ve partnered with Ann-Marie Matthews, Legal Advisor at The Beyond Group East Anglia Limited who’s written a series of guest posts for our blog, designed to help you with wills, trusts and estate planning.

Today’s guest post looks at trusts and some common scenarios where they’re used. Read on to get all the important info.

Trusts are legally binding arrangements. Under a trust, you’ll choose trustees to look after certain assets, for example, specific investments or a general portfolio intended for your children.

Trusts are commonly used in a number of different situations. Here are a few of the most frequent examples.

Following a successful personal injury compensation claim

If you’re successful in a compensation claim following a personal injury, vehicle accident or similar, it’s often a good idea to place the award in a trust. This gives you the opportunity to “double up” on the benefit from your claims, because you can benefit from the compensation award as well as receiving means tested benefits – because you’ve locked the award away in a trust.

If you have young children who will inherit

A very common form of trust is where parents state in their Wills that their inheritance will go into a trust. This can then be looked after for their children for a period of time. This can be anything but a common example is until their children’s 25th birthdays.

If one of your loved ones has a learning disability

If one of your loved ones has a learning disability and is set to inherit a lump sum outright, it may be a good idea to put the money into a trust. Any lump sum inheritance can affect means tested benefits, so it’s common to place the money into a flexible trust. Doing this means your loved one can benefit from the trust and still get means tested benefits.

Handing inheritance through to successive generations

One common use of a trust is setting up a pot of money that’s made available to different generations, for example your children and grandchildren. This avoids the money being subject to being taxed twice via inheritance tax both on your death and then the death of your children in the future.

Ensuring assets remain within your family

One common scenario with Wills occurs when, for example, a widow remarries following her inheritance from her first husband. She may end up inadvertently leaving this inheritance to her second husband, simply because when she remarries her original Will would automatically be cancelled. To prevent this from occurring, the first husband could set up a trust in his Will in favour of his wife, meaning that the inheritance wouldn’t then automatically pass on.

Ensure that your trust takes advantage of the residential nil rate band

Inheritance tax planning is an essential aspect of estate planning, and one that trusts can help with. With changes to tax-free allowances applying from April 2020, it’s vital to ensure that any existing arrangements allow for tax relief to be claimed.

Discretionary trusts established by Wills are a great way to allow trustees to maximise the benefit of this tax relief, whilst also taking into account any future changes in circumstances. It’s vital if you do establish this type of trust, though, that the trustees use their discretionary powers within two years of death. If they don’t, the relief may not be able to be claimed.

Looking for specific advice on how trusts may help your estate planning? Contact Ann-Marie on 01603 972525, or [email protected]

First published January 2021; last reviewed November 2023