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Wills & Probate

TRUSTS

Matrimonial

Tax Planning

 

 

 

 

 

There are many different types of trust including charitable trusts, discretionary trusts, accumulation and maintenance trust, lifetime trusts and bare trusts. A trust can be created by an individual during their lifetime or by a will so that the trust only comes into effect upon death. Many trusts are created by the intestacy rules when someone dies without having made a will. That is often not what the deceased would have wanted and is one reason why everyone should make a will.
 
Discretionary trusts
If you are fortunate enough to have a relative or friend prepared to give you some money you will want to make sure you make the most of it and give the tax man as little as possible. If you have children one very useful income tax shelter is a discretionary trust.
The trust will stipulate that a number of people can benefit from the money put in to the trust. These people are known as the "class of beneficiaries" and can include you and your children. Who actually benefits is decided by the trustees. The decision is at their discretion, hence the name discretionary trust.
 
Instead of giving the money to you it is put into the trust. The trustees invest it and exercise their discretion to distribute the income from the investments to your children for their education, maintenance and benefit. Basic rate income tax is likely to have been deducted from the income before it reaches the trustees and they will have to pay additional rate tax. The distributions of income to the beneficiaries are made net of all this tax.
 
If the beneficiaries do not pay tax because their income is below the annual personal allowance then they can claim that tax back which the trust income has suffered.
 
Your children can therefore receive a tax free income and as it is used for their education maintenance and benefit it is likely to be a useful addition to the household budget. This shelter is much more tax efficient than simply transferring the money to you without a trust if you are a tax payer. The scheme is even more effective if you are a higher rate tax payer. If you are one of the trustees you can always distribute the income to yourself without the tax advantages.
 
Capital can also be distributed to any member of the class of beneficiaries provided the trust deed is worded correctly. The trust can be wound up and the capital distributed once the trust has served its purpose.
 
Key Requirements
You can be a trustee and a beneficiary but you cannot be the one who provides the money which is put into the trust. If you do provide the money the distributed income will not be treated as your children's but yours for income tax purposes.

 

The trustees should be carefully chosen as it will be they who have control of the money and the distributions. They will also have to fill in a tax return for the trust each year and provide the beneficiaries with a tax deduction certificate. The trustees will have to keep careful records of how the trust is operated.

 

If income is distributed to a child the trust should provide that it can actually be paid to the child's parent or guardian on their behalf. The claim for repayment of the tax will have to be made by the parent or guardian on behalf of the child each year.