Quilter 13 Trusts A trust is one way to move money out of your estate in order to reduce your inheritance tax (IHT) bill. It avoids potentially lengthy probate delays, so that the people you want to benefit from your estate do so as quickly as possible. However, you should be aware that with some trusts, you have to forgo access to some or all of the original capital as well as any future growth. Simply put, a trust allows you (the Settlor) to entrust your assets to a group of people (the trustees). The trustees are the legal owners of the assets and manage the assets for the benefit of your trust’s beneficiaries. It is the trustees’ responsibility to manage and ultimately distribute the trust fund to the beneficiaries. You can put all manner of assets in trust, including investments, life assurance policies and death benefits. Certain trusts not only allow you to pass on your wealth when you die, but can also give you access to regular ‘income’ while you are alive, in the form of withdrawals. However, the trust needs to be established correctly to avoid any ‘gift with reservation’ issues, which would mean the asset was still classed as being inside your estate for IHT purposes (see page 14). How trusts work A trust can reduce your IHT liability by transferring assets progressively out of your estate. The IHT liability on these assets will reduce in stages over a seven-year period and after seven years, the assets will be outside your estate and therefore exempt from IHT. However, should you die within seven years of creating a trust, the tax on your gifts may benefit from a reduced rate of tax, known as taper relief. Transfers out of your estate are considered as either chargeable lifetime transfers (CLTs) or potentially exempt transfers (PETs), depending on the type of trust chosen. The tax treatment for each is slightly different, as highlighted below. Either way, and regardless of whether you survive the seven-year period, a trust can significantly reduce your IHT liability. Chargeable lifetime transfers Some gifts are considered as CLTs. These would be gifts into a trust, other than a bare trust (where there is a named beneficiary which cannot be changed). If the CLT gift amount exceeds your available nil-rate band it can be subject to IHT at a rate of 20% at outset. Should you die within seven years, additional tax may be payable on a CLT * . There is no refund for any overpayment of tax paid during your lifetime. Please note: entry, exit and periodic charges apply. See pages 20 and 21 for more details. Potentially exempt transfers Some gifts are considered as PETs and are not liable to immediate IHT. These can be outright gifts, or gifts into bare trusts. After seven years, the PET will fall outside your estate for IHT purposes. However, should you die within seven years, the PET will become chargeable and IHT will be due at 40% * on the gift amount after deduction of any available nil-rate band. * T aper relief may reduce the tax due. See page 14 for more information.