What is a Trust?
Put simply, a trust is a legal arrangement where property/assets are held by someone, ‘the trustees’, on behalf of someone else, ‘the beneficiaries’, subject to the terms of the trust.
What is a trust
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Who are the parties to a trust?
Settlor
The settlor is the provider of the funds for the trust. A settlor can also be a beneficiary of his or her own trust although this would represent a ‘gift with reservation’ and therefore would generally make the trust ineffective from an inheritance tax perspective. Although some of our trusts allow for joint settlors, this option should only be chosen where both parties are the providers of the funds, or joint plan owners in the case of an existing plan.
Trustees
Trustees must be at least 18 years of age, of sound mind and should be not bankrupt. Beyond that, as the name implies, trustees should principally be people whom the settlor feels can be trusted. With the exception of the Discounted Gift Trust, our trusts do not automatically appoint the settlor as a trustee. However, the settlor can appoint him or herself as a trustee and additional trustees could include family friends, family members, professional advisers or a trust corporation. Beneficiaries may also act as trustees although care should be exercised to avoid any potential conflicts of interest.
When accepting the role of trustee, it is important that the trustees fully appreciate the terms contained within the trust deed and the legal principles which govern the trust. The Isle of Man Trustee Act 2001 updated the statutory powers and duties of trustees contained in the Isle of Man Trustee Act 1961. Although the full provisions and implications of this Act are outside the scope of this guide, under this Act trustees have a statutory duty of care when carrying out their duties as well as a duty to act in the best interests of the beneficiaries.
Beneficiaries
These are the beneficial owners of property held within the trust. If a client establishes a discretionary trust, the trust will appoint both classes of discretionary and named beneficiaries. Alternatively, if a client establishes a bare trust, there will be no discretionary beneficiaries and instead the settlor will appoint one or more absolute beneficiaries. The differences between these three types of beneficiary are explained next:
Discretionary
‘Discretionary beneficiaries’ is the name given to beneficiaries of a discretionary trust. They may only benefit from the trust funds at the trustees’ discretion and could also be excluded from benefiting at a future date. The death of a discretionary beneficiary does not have any Inheritance Tax implications for the trust.
Name (where applicable)
A named beneficiary has an entitlement to income but not capital. In the event that the trustees do not make an appointment of capital during the lifetime of the trust, the trust fund would default to those individuals who are named in the trust deed as named beneficiaries in the percentage shares stipulated in the trust deed.
Absolute
An ‘absolute’ beneficiary is the name given to beneficiaries of a bare Trust. An absolute beneficiary will have an outright entitlement to capital from the trust and is able to demand payment of their share of the trust fund once they reach the age of majority.
If an absolute beneficiary dies, the portion of the trust fund belonging to him or her forms part of their estate for Inheritance Tax purposes.
Therefore, after the beneficiary’s death, his or her share must be passed to his or her estate to be distributed in accordance with the terms of the will or via the laws of intestacy in their particular jurisdiction. If a client establishes a bare Trust it is not possible to change the absolute beneficiaries.
Why use a trust in conjunction with an offshore plan?
There are various reasons why an individual might wish to place their plan into a trust or invest through a trust into a plan. The most common reasons are listed below:
To avoid Isle of Man Probate
Any plans issued in the Isle of Man are classed as Isle of Man assets and Isle of Man Probate will be required on the death of the last plan owner before either proceeds can be paid out or the plan is re-registered into the name of the new owner. Grant of Probate/Letters of Administration refers to the situation where, on a person’s death, the court must confirm that the executors are entitled to deal with the deceased’s estate before any assets can be distributed.
If a plan is placed into trust, legal ownership lies with the trustees and Isle of Man Probate will not be required on the Settlor’s death. Therefore, this can help to provide privacy, as unlike trusts, Grant of Probate/Letters of administration records are available to the public.
As long as there is a surviving trustee, proceeds of the plan can therefore be paid to the beneficiaries without delay.
To control family assets
Trusts have an advantage over an outright gift as the donor can exercise a degree of control and can still have access to capital in some limited cases. Many investors wish to set aside assets for the future benefit of members of their family whilst restricting beneficiaries’ access until it is thought appropriate that those assets should be distributed. If the plan is written in a discretionary trust, the trustees can be instructed to hold the plan until the beneficiaries reach a certain age or for future children or grandchildren.
Inheritance Tax planning for UK domiciled individuals
For individuals who are domiciled or deemed domiciled in the UK, Inheritance Tax applies to their worldwide property and would therefore include offshore investments. By arranging for the offshore plan to be held under trust, all or part of the proceeds from the plan may be removed from the settlor’s estate for Inheritance Tax purposes depending upon the type of trust chosen.
As you will see later in this guide, we offer a range of trusts which can be used to mitigate UK inheritance tax.
Inheritance Tax planning for non-UK domiciled individuals
An individual who has been a long term resident of the UK for income tax purposes but is not UK domiciled or deemed UK domiciled may wish to consider the establishment of an Excluded Property Trust in which to hold their offshore plan.
This is because non-UK domiciled individuals who are likely to remain in the UK in the medium to long term can avoid future liability to Inheritance Tax on non-UK assets if those assets are placed in trust prior to becoming resident in the UK for 15 out of the last 20 tax years (i.e. whilst the individual is still non UK domiciled).
The trust assets will remain excluded property for as long as they remain in trust and are situated outside the UK (e.g. an offshore plan). Please also note that where an individual returns to the UK to become UK resident and they were born in the UK with a UK domicile of origin but later emigrated and acquired a foreign domicile, and they were UK resident for at least one of the two previous tax years, they would be deemed domiciled for IHT purposes and known as a Formerly Domiciled Resident (FDR). In this scenario an Excluded Property Trust would not work for IHT mitigation purposes as whilst the settlor is an FDR and UK resident the trust would fall within the scope of IHT.
If an individual wishes to establish an Excluded Property Trust then please refer to our Excluded Property Trust Guide.