Tax efficiency of a trust

mr_gnat

Malthusian said:

mr_gnat said:

Well, I have one child to whom it wouldn't be sensible to give lots of inheritance to as a lump sum, so I think a trust is probably best in this scenario in order to oversee it.

Then that turns the scenario on its head compared to the original post, where the driver behind setting up a trust was to reduce the inheritance tax bill.

Trusts pay penal rates of tax compared to individuals so the starting point is that putting money in a trust = more tax, even if it's possible to limit the impact with proper planning.

Giving money away (whether to a trust or directly to a beneficiary) may be more tax efficient than hanging onto it until you die, but it's the giving away part that reduces the IHT bill, not the trust part.

So you may need to decide which is more important, simplicity and lower costs and taxes, or preventing the child from accessing all of their share of your estate at once.

Who do you plan on appointing as trustees, who would have the job of deciding who gets what from the trust and when? If all three potential beneficiaries are compos mentis adults they would be able to wind the trust up and share out the proceeds. Preventing that would typically mean including other potential beneficiaries you haven't mentioned yet. These seem more important considerations to discuss with a solicitor than non-existent inheritance tax savings.

The original focus was the special case, and I now seem to have been drawn into something more complex, I sense the rule of thumb is, trusts are not a tax efficient vehicle, but are intended for specific purposes.

Malthusian

mr_gnat said:

Can Carla simply set the trust up when she dies as part of her will?

Yes, but her Inheritance Tax position would be exactly the same as if she'd left the money to her beneficiaries directly.

whats the 'normal' arrangement?

If you have three beneficiaries who are equal in your eyes, then the normal arrangement is that your executors would liquidate your estate and split the money three ways between your beneficiaries, which they can do whatever they want with (if they're all compos mentis adults).

If the objective is for one of your beneficiaries to benefit from the money but not to inherit it directly (thus having the right to spend it all) then things inevitably get complicated.

A good solicitor would be talking this through with you but yours seems to have wasted time bamboozling you about how chargeable lifetime transfers work.

mr_gnat

I think I'm done, I think I know what I intend to do, and thats concentrate on the important issue and ignore anything to do with tax.

Keep_pedalling

mr_gnat said:

Keep_pedalling said:

Trusts do not magically reduce IHT, simpler method such as gifting are often better options.

How big is your state and how much of that is made up of your home? What is your marital status?

lets say divorced, 350k home, 800k in total.

The nicest way to avoid IHT would be have a dam good time and burn through £300k over whatever time scale you think appropriate.

cookay

I personally think trusts are a pain and can be expensive to set up and run but there are lots of different sorts. 
I think some trusts are not counted as part of someone's estate so maybe that is to do with saving IHT.  But they could create 'chargeable events' when you die, at the going income tax rate, depending on who the trust is left to.

Malthusian

cookay said:

I think some trusts are not counted as part of someone's estate so maybe that is to do with saving IHT.

Giving the money away early enough is what saves the IHT, not giving it to a trust.

But they could create 'chargeable events' when you die, at the going income tax rate, depending on who the trust is left to.

That sounds more like an insurance bond than a trust.