A Family trust is a trust set up to benefit members of your family with the purpose generally being for you to progressively transfer assets to the trust over your lifetime, (subject to you being able to afford to do so), so as to reduce the value of your estate on your death for Inheritance tax (IHT) purposes. They are created to safeguard your assets and ensure they ultimately pass to your chosen beneficiaries, no matter what happens.
Assets within a Family trust are available to be given, used by, or loaned to your chosen beneficiaries, but whilst they are in the trust, the family beneficiaries do not own them. This means the assets are protected if a beneficiary should divorce, or become bankrupt, or if a beneficiary is in receipt of welfare benefits. They are also useful as protection against wayward children and to give protection for vulnerable people.
To get the maximum benefit from a Family trust, you should aim to have assets transferred to it by age 60 at the latest. For this reason we recommended that people in their forties and fifties consider the advantages of a Family trust.
Why is this? As an illustration, if a single person aged 70 to 80 proposed gifting assets of £200,000 to a Family trust, they would need to live seven years for the value placed into the trust to fall out of their estate for IHT purposes. At such an advanced age, it could be considered overly optimistic that the 7 years will be met so it is better to start the process when you are younger.
Property, cash or investments can be transferred to a Family trust after which the assets are no longer owned by you. The main advantages of this arrangement are as explained above. Additionally, as assets given away are no longer within your estate, they cannot generally be assessed for care fees. This is provided that you are not transferring the assets to the trust to deliberately deprive yourself of the means to pay for care, and additionally that your health is generally good when you place the assets into the Family trust.
It is now no longer possible for an individual to create multiple trusts on different days and for those trust to receive their own full IHT nil-rate bands of £325,000 as the government has introduced legislation to prevent this. The effect of this, according to HM Treasury, is that although individuals will no longer have the advantage of multiple nil-rate bands, they will be able to settle property up to the value of the nil-rate band into a Family trust every seven years.
These new rules apply to all charges arising on, or after, 6 April 2015 in respect of relevant property trusts created on, or after, 10 December 2014. Whilst they represent a big change to the old law, they still leave plenty of opportunity for Family trusts to work both for asset and wealth preservation purposes, and as an IHT planning strategy. Provided that you start the process early enough in your lifetime, you will have plenty of scope to settle £325,000 (at current rates) into a Family trust every seven years.