Trusts and Estate Planning - Why They May Become Even More Important from April 2027
We understand that planning for the future can be complex. That is why we aim to keep you informed about financial planning strategies that can help protect your wealth and ensure it passes to your loved ones as efficiently as possible.
In this article, we explore how trusts can help protect family wealth, provide greater control over assets and potentially improve inheritance tax (IHT) planning, particularly in light of the changes to the taxation of pensions from April 2027.
What is a Trust?
A trust is a legal arrangement where you (the “settlor”) transfer your assets (like money, property, or investments) to a Trust and appoint people (the “trustees”) to manage the Trust going forward. The trustee manages these assets for the benefit of the people you choose (the “beneficiaries”). Think of it as a way to control how your wealth is used even after you are no longer around.
Why Are Trusts Important?
Trusts can serve many purposes, but the most common reasons people set them up include:
Asset Protection: Trust assets may be protected from certain risks such as divorce, bankruptcy or creditors, depending on the circumstances and type of trust used.
Control and Family Protection: A trust allows you to decide who benefits from your assets, when they receive them and under what circumstances, even after you’re gone.
Estate Planning: In certain circumstances, assets placed into trust may fall outside of your estate for IHT purposes, helping to reduce the value of your taxable estate. For example, if you gift assets into an appropriate trust during your lifetime and survive the relevant period (typically seven years for many transfers), the value of those assets may fall outside your estate. As a result, the assets held within the trust could pass to your chosen beneficiaries without being subject to IHT as part of your estate.
Changes to Inheritance Tax and Pensions from April 2027
Historically, pensions have been one of the most tax-efficient vehicles for both retirement planning and passing wealth to future generations, as defined contribution pension funds generally fall outside an individual’s estate for IHT purposes. At Autumn Budget 2024, the government announced several measures to reform the way pension funds are taxed by bringing unused pension funds and death benefits within the scope of IHT from April 2027. For many families, this could significantly alter estate planning strategies and reduce the effectiveness of pensions as a long-term IHT planning solution.
How Trusts May Help
Here’s how they might benefit you in light of pension IHT changes:
Reducing Future Inheritance Tax: Assets transferred into trust may fall outside of your estate after the relevant qualifying period, helping to reduce the value of your estate that may be subject to IHT.
Greater Control: Trusts allow you to specify how and when beneficiaries receive assets, rather than assets passing outright.
Protecting Family Wealth: Trusts can help preserve wealth for future generations and provide protection against future events such as divorce, bankruptcy or financial difficulties.
Flexibility: Certain trusts, such as discretionary trusts, allow trustees to make decisions based on beneficiaries’ circumstances at the time, which can be particularly valuable if tax legislation changes in the future.
Life Assurance Planning: Writing protection policies into trust can help ensure that proceeds are paid quickly, outside of the estate and directly to beneficiaries.
Things to Consider
Trusts are not suitable for everyone, and they do not automatically avoid inheritance tax. Depending on the type of trust used, there may be tax implications, administrative responsibilities and ongoing reporting requirements. The suitability of a trust will depend on your personal circumstances, family situation, assets and longterm objectives.
What Should You Do Now?
If you are concerned about the potential impact of future IHT changes or feel that trusts might be suitable for you, we’re here to help you navigate these complexities and make sure your wealth is protected for the future. Trusts may form part of the solution, alongside other planning opportunities such as gifting, making use of exemptions, life assurance and reviewing how your assets are structured.
Get in Touch
If you would like to discuss Trusts or any other aspect of your financial planning, please contact your financial planner.