Trusts & Gifting
Trusts are robust legal arrangements that allow you to provide financial security for future generations. Read our guide on trust funds and gifting to learn more.
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Understanding Trust Funds and Gifting
Trust funds are an essential part of the estate planning process.
They provide a structured and organised way to distribute assets and can be used to reduce estate taxes.
In this guide, we explore trust funds. We look at what they are, the different types and other key information.
What is a Trust?
At its core, a trust is a legal entity that holds and manages assets for the benefit of a third party known as the trust beneficiary.
The individual creating the trust, known as the settlor, transfers assets into the trust to be managed by a trustee. The trustee is responsible for administering the trust and transferring assets to beneficiaries in accordance with the terms outlined by the settlor.
Trust funds are commonly used to achieve specific financial goals, such as:
- Providing for family members
- Minimising estate taxes
- Protecting assets from creditors
They are versatile and effective tools that can be tailored to meet the unique needs and objectives of the settlor.
A trust can hold a wide variety of different assets. Some of these include:
- Investments, such as shares and bonds
- Cash
- Real estate and other property
- Investment funds, such as mutual funds
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How do Trust Funds Work?
The way a trust fund works is simple.
You decide what assets you want to add to the trust and how they should be used. This is usually specified in a trust document.
When assets go into a trust fund, you no longer retain ownership. They are owned by the trustee.
This means that any 'assets in trust', as they are known, will no longer form part of your taxable estate. As a result, those assets won't be liable for Inheritance Tax.
Due to their tax benefits, trust funds are a fantastic tool for generational wealth transfer.
Different Types of Trusts
Like insurance products, trust funds come in different shapes and sizes, each with a specific function and purpose.
The type of trust you set up will depend on several factors, such as your objectives and how you want your assets managed.
Some of the common types include:
- Revocable Living Trusts
- Irrevocable Living Trusts
- Discretionary Trusts
- Testamentary Trusts
- Charitable Trusts
These trusts are flexible and can be altered or revoked by the person setting up the trust during their lifetime. A revocable trust is often used to avoid probate, ensuring a smooth transition of assets to beneficiaries.
Once established, these trusts cannot be modified or revoked without the beneficiaries' consent. Irrevocable trusts are commonly used for asset protection and estate tax planning.
With a discretionary trust, the trustees decide how and when the trust assets are distributed. They are a popular choice for funding education for grandchildren or looking after someone unable to manage their affairs.
These trusts are created within a will and only take effect after the death of the person who set up the trust fund. They are often used to provide for minor children or to distribute assets over time.
These trusts are set up for charitable purposes. They allow you to donate assets to a charitable organisation while retaining certain benefits, such as an income stream during your lifetime.
The Benefits of Trust Funds
- Asset Protection
- To Avoid Probate
- Control and Flexibility
- Tax Planning
Assets in trust have a level of protection from creditors. Trusts also offer legal protection, shielding them from certain claims and liabilities.
Assets held in a trust typically bypass the probate process, allowing for a smoother transfer of assets. The probate process can be time-consuming. Not only that, but depending on your location, probate costs can be high.
Trusts allow you to specify how and when assets are distributed. They also offer a great deal of flexibility, allowing you to set the terms and conditions.
Trusts can be used as effective tools for tax planning. Certain types of trusts may provide tax advantages, such as reducing estate taxes, capital gains taxes or income taxes.
What is gifting?
Gifting refers to giving friends or family financial gifts while you are still alive. Doing so can help reduce your estate's overall value and, subsequently, the amount of Inheritance Tax (IHT) due.
Your annual 'gift allowance' per year is £3,000. This is the amount you can give away in cash or assets each tax year. Gift taxes may apply if you exceed your annual allowance.
However, there are exceptions. For example, you can give a child a wedding gift of up to £5,000.
To learn more about gift exemptions from Inheritance Tax, visit the Moneyhelper website.
Trust Funds vs Wills
While they both fall under the estate planning umbrella, trusts and Wills differ in a few key areas.
A Will is a document that outlines post-death asset distribution. Meanwhile, trust assets can be distributed during your lifetime.
Another key difference is that a Will goes through probate and is public. Trusts can avoid probate and offer more privacy as their details are inaccessible in the public domain.
A Will also handles things beyond your estate. For example, it can be used to state who will look after children or pets when you die. They can also outline funeral arrangements and other final wishes.
Most people's estate plan will consist of both a Will and a trust. However, it's essential to know the difference between the two and the role of each.
Establishing a Trust Fund with Holborn Assets
Trust funds offer a versatile solution for generational wealth transfer. They also act as a powerful tool for managing and distributing your assets.
But with different types of trusts and ways to set them up, it's crucial that you find the right solution to meet your needs. If you would like to learn how you can benefit from setting up a trust, we can help.
Holborn Asia offers independent, professional advice and wealth management solutions.
Our team offers a range of estate planning services to help ensure future financial security for your loved ones. Our financial advice is tailored to your needs and goals, so you can be sure you are in safe hands.
We are part of the wider Holborn Assets Group, a leading, award-winning financial advisory company with over $2 billion in assets under management (AUM).
Book a free, no-obligation meeting today to learn how we can help you.
Frequently Asked Questions
Trust funds offer several benefits, including asset protection, tax advantages, and ensuring that your assets are distributed according to your wishes.
