Although it can be a somewhat overwhelming and uncomfortable conversation to have, it is important to consider what happens to your property when you die.
Planning for this asset and for the people who potentially live in it, rely on it or are expecting to inherit it, is crucial; providing protection for the asset whilst you are alive as well as its safe distribution to any intended beneficiaries thereafter.
A trust can be an effective solution for owning and managing your asset(s), in this case a property. However, if this is something you are considering, you should know a few fundamental things.
What is a Trust?
A Trust may be established during a Settlor’s lifetime, or upon death under the terms of a will.
Stated simply, it is an arrangement by which the owner of an asset, known as the Settlor, passes legal ownership of assets to Trustees. The Trustees administer the assets subject to the defined terms of the Trust Deed and in accordance with the governing law.
Types of Trusts
A Discretionary Trust is an arrangement whereby the Trustees have the power to effectively choose and decide, at their discretion, how and when the assets get used and who they get distributed to.
A Revocable Trust can be changed or terminated by you as the Settlor during your lifetime and can serve to benefit you while you are alive. A revocable trust typically becomes irrevocable upon the trustor’s death.
An Irrevocable Trust cannot be changed once it has been established as ownership of any assets lies with the Trust and not with you as the Settlor.
A Living Trust can determine how your assets can be used to your benefit during your lifetime. As the Settlor, it is possible for you to be a Trustee of your trust and you can name a co-trustee i.e. a spouse, relative or professional advisor, who can continue to manage your Trust’s assets when you are no longer able.
Uses
Trusts can be used in a number of ways and are often established for a number of reasons:
• Asset Protection – The ability to protect the personal assets of the Settlor from the claims of future creditors to the extent permitted by law.
• Enhanced confidentiality – Assets are held in the name of the Trustee(s), resulting in the name and identity of the Beneficiaries being kept confidential for the term of the deed.
• Tax planning – A trust may be used to mitigate tax liabilities. In certain jurisdictions, assets owned are considered to be outside the estate of the Settlor on death.
• Estate/succession planning – A tool enabling a provision to be made for family members, relatives or friends, to allow flexibility in situations where domestic inheritance rules may be otherwise imposed.
• Protection of those unable to look after themselves.
Pros and Cons
There are a number of benefits to placing your property in a trust, however there are also a number of factors that require careful consideration.
Pros
Protection – Trusts are typically used by individuals to protect any property they own. More often than not, a property is a person’s biggest asset, so it is only natural to want to protect and safeguard it from any potential tax liabilities or unforeseen costs i.e. care home fees. A trust can also protect your property, should any of your beneficiaries get divorced or become bankrupt during your lifetime.
That said, it should be noted that in order to do so effectively, timing is of the essence and is important in preventing any accusations of deliberate deprivation of your assets.
Avoid Probate – Probate can be expensive, takes time and is public. Many use trusts to own property to avoid probate. A trust can afford the ability to transfer the title to your property to your beneficiaries efficiently and effectively. Furthermore, if you are looking to transfer properties outside of your resident jurisdictions, it can help avoid probate in those jurisdictions also.
Prevent sideways disinheritance – Whilst you might own your property jointly with a spouse, you may still wish for your children/grandchildren to inherit that property when you die.
However, sideways disinheritance, albeit often accidental, can result in the disinheriting of intended beneficiaries. As an example, if you were to pass away before your spouse, your surviving spouse may go on to remarry or may even fall out with your intended beneficiaries (children/grandchildren). Consequently, the new husband or wife can end up inheriting the property, rather than your intended beneficiaries.
A trust can ensure that your chosen beneficiaries inherit your property, irrespective, providing peace of mind that your wishes will be fulfilled, regardless of what happens after you die.
Incapacity protection – Nothing in the world is as certain as death, but you cannot predict the circumstances which lead up to your passing. Should you become ill or unable to manage your own finances effectively; a trust can offer protection over your property as well as its ongoing management until your time of death.
Potential tax savings – Creating a trust without a good estate plan is likely to provide you with little or no tax benefits. However, obtaining the appropriate professional advice might save some estate taxes, if your trust structure has been developed and established according to the same.
Cons
Tax liabilities – Setting up a trust without the appropriate professional tax advice is like running into a burning building. In fact, doing so can result in adverse tax implications for you and/or future beneficiaries, such as large unexpected Capital Gains Tax, Inheritance Tax, Income Tax or Stamp Duty Land Tax bills.
Deliberate deprivation of assets – Many believe that by simply placing their property in a trust they can avoid things like care home fees or inheritance tax as the property is no longer legally theirs and subsequently their capital decreases. Whilst you may do this with all good intentions, to pass on your property (and any related proceeds) to your intended beneficiaries, it may be perceived as a deliberate deprivation of assets by your local authorities.
Should this happen, your property will be included as part of your capital and furthermore, you will have wasted the time and money involved in establishing and running an unsuccessful trust structure.
Another thing to consider is the seven-year rule, whereby you will likely need to survive for seven years after gifting your property to a trust (or another person) for it to no longer count as part of your taxable estate.
Administration/Accurate Record Keeping – In order for a trust structure to be effective, there is a significant amount of administration required as well as accurate ongoing record keeping. You will need to ensure that ownership of your property is legally transferred to your trust and that the title of your property is updated to reflect such changes.
This will undoubtedly cost money, require paperwork and be time consuming. However, whilst most of us dislike such paperwork and its administration, it will be worth much more than the time and money you could lose in probate and the associated impact it can have on your family trying to access your assets following your passing.
Words of warning
The advantages of putting your property into a trust far outweigh the disadvantages but creating a trust should not be looked on as a simple solution.
There is so much more to it than just evaluating the pros and the cons; it is vital that you obtain the appropriate professional legal/tax advice and engage a professional service provider to implement a structure that meets your objectives, is fit for purpose and will yield your desired results.
How can we help?
At Sentient International, we have been providing a comprehensive range of fiduciary services, including acting as Trustees, for over 35 years.
Our professional trustees understand the importance of upholding our clients’ wishes. As such, we consider it integral to develop a relationship with each client and to work closely with their advisors, to ensure that any structure we establish properly reflects the client’s intentions and meets their objectives.
Our independence as a service provider means that we are able to offer our clients flexibility as well as quick decision-making. This, complemented by our knowledge and experience means we are able to deliver effective solutions, managed with the highest level of integrity, whilst ensuring all decisions made remain in the best interest of the client and their beneficiaries.
To find out more about placing your property in a trust or if you would like to discuss your trust requirements, please get in touch via telephone on +44 1624 616544 or by emailing info@sentientinternational.com.
