Trusts and Estate Planning

There are a number of advantages to placing your assets in a trust for estate planning purposes. Setting up a trust will affect how much estate duty and capital gains tax (CGT) your estate will pay and the provision you make for your dependants after your death. A trust is a key tool in estate planning for wealthier individuals. A trust is effectively an entity which separates control over an asset (by you and other trustees) from the enjoyment of the benefits of that asset (by you and others).

The three main uses of a trust are:

  • To freeze the value of an estate which has a high asset value. If you transfer an asset to a trust, the asset's value does not grow in your hands which would increase the amount of estate duty that will have to be paid on your death.
  • To hold and protect assets for minors/incapacitated dependants.
  • To protect assets in the event of insolvency. Creditors cannot claim money held in a trust.

There are a number of advantages to placing assets in a trust for estate planning purposes. These advantages include:

  • Saving on estate duty. The growth on assets, such as shares, transferred to a trust is not subject to estate duty, because the growth belongs to the trust.
  • A trust does not die. This means that a trust is not liable for estate duty, other taxes or costs, such as transfer duty, executor's fees, or conveyancing fees, that would be payable in the hands of your estate or heirs. Also, the trust does not pay CGT as long as an asset is not sold.
  • Fixing value. The value of any assets transferred to a trust is effectively frozen for estate duty purposes.
  • Trusts continue to pay benefits to dependants (beneficiaries) after you die. On the other hand, assets in your estate may not be freely available to your dependants, because your estate is frozen during the winding up process.
  • Protection of assets. If a beneficiary becomes insolvent, the assets in the trust continue to be protected (unlike shares in a company). Likewise, if you, as the donor, or the trustees become insolvent, the trust's assets remain protected.
  • Tax-efficient income splitting.