Protecting your assets with a trust fund

trust fund

If you’re thinking of setting up a trust fund, it’s important to understand how this will work and what it will protect. If set up correctly, a trust ensures you and your family have control over your assets and estate. But there are a lot of common misconceptions about trusts and the protection they can offer. So, how can you use a trust to protect your assets?

In our previous blog, What’s the difference between a lifetime trust and a will trust? we compared these two common types of trust funds. Let’s now explore how you can use a trust for different purposes, including inheritance planning.

How can you use a trust fund to protect your assets?

Can a trust reduce future inheritance tax?

Yes, this is one of the main financial planning benefits of using a trust fund, but some strict rules and conditions need to be met first. If you set up and put money into a trust, you will be known as the ‘settlor,’ and you can then specify how you would like the trust to be run and by who; the ‘trustees’. Trustees are the people nominated to manage your assets on behalf of the ‘beneficiaries;’ those who stand to inherit the trust fund from you.

There are different types of trust, and depending on which type you set up, the tax treatment is different. That’s why before setting up a trust for inheritance tax purposes, it’s important to seek professional advice to ensure you have the right one for your personal situation and future wishes.

The assets in a trust fund can typically be subject to three types of tax; income tax, capital gains tax, and inheritance tax.

When it comes to inheritance tax, with most trusts, if the total value of any gifts you’ve made in the last seven years, including the value of the assets you’re putting into the trust, totals less than the IHT threshold (currently £325,000 in 2022) there won’t be an immediate IHT charge to pay (if you go over you may have to pay 20%). What’s more, any assets put into the trust won’t be liable for inheritance tax if you live for seven years after making the gift. However, every 10 years, assets in the trust will need to be revalued and may be subject to a 6% charge on their value, and there are ‘exit charges’ if you close the trust or remove the assets.

The income tax and capital gains tax treatment of the assets whilst in the trust can vary depending on the type of trust and your circumstances, so we would advise speaking to a financial planner or trust specialist.

Can a trust protect my estate while I’m alive?

Yes. In our previous blog, What’s the difference between a lifetime trust and a will trust? We discussed the main differences between a trust fund that starts when you are alive and one that comes into force on death.

Lifetime trusts are a way to protect or ring-fence your assets by transferring your assets’ ownership whilst you’re alive. They can provide peace of mind by gifting your assets to a loved one but still retaining an element of control and protection against things like bankruptcy or divorce. They can’t, however, be used to avoid paying care fees.

Can a trust help me avoid care home fees?

Not necessarily – this is a myth, and many people set up a trust fund thinking this will help them avoid them paying out costly care fees in the future. But if you have put your home into a trust to avoid such fees, this would be classed as a “deliberate deprivation of assets,” and the local authority can challenge this.

However, your home will not be included in local authority assessments if you share your home with a partner or child or your personal estate worth less than £23,250 (April 2022).

As part of the social care reform, from October 2023, the government will be bringing in a new £86,000 cap to limit how much anyone spends on personal care over their lifetime. In the meantime, if care fees are causing you some concern, our team are on hand to help and can discuss the options available.

If you are looking at ways to protect your assets and estate, our team offer advice on trust funds and any aspect of financial planning. Please get in touch to speak to our independent financial planners.