Setting Up an Inheritance Tax Trust: Step by Step Guide

Inheritance Tax avoidance is amongst the most common reasons for the establishment of a trust. Despite recent changes to the rules meaning that fewer householders now fall within the Inheritance Tax (IHT) boundaries, rising property prices mean that IHT will remain an important concern for many.

Although there is a very high awareness of IHT amongst the general public, a surprisingly small number of individuals actually do anything to minimise their beneficiaries' liability. Establishing a trust is one of the most effective ways of mitigating the effects of IHT, and it is a relatively simple process.

Do You Need a Trust?

Many people do not actually need to establish an IHT trust, either because the value of their estate falls below the Nil-Rate Band or because they can minimise their liabilities through other methods like gifting. It is also important to remember that married couples or those in civil partnerships can combine their Nil-Rate Band allowances. This means that no IHT will be charged on estates with a value of up to £650,000 (for the tax years up to 2014-15) will not attract any IHT.

Inter Vivos or Testamentary?

If it appears that you do require a trust, you must consider whether to opt for a testamentary or inter vivos arrangement. An inter vivos trust is constituted during your life, while a testamentary trust only comes into existence upon your death. Most IHT trusts are testamentary, but there may be call for an inter vivos arrangement, particularly if you want to see your beneficiaries enjoy the assets but need to give away more than your annual gifting allowance.

If you opt for an inter vivos arrangement you should note the difference between revocable and irrevocable trusts. A revocable arrangement may be judged unfavourably by HM Revenue and Customs.

Draw Up Your Trust Deed

A trust can be established very easily; indeed, all it actually requires is a few sentences. However, given the implications of an invalidly worded deed, you should always consider seeking legal advice before you begin.

Testamentary trusts are outlined in the individual's will, in which the beneficiaries and trustees are named and the assets for settlement are described. There is generally no need for a separate trust deed, although this is sometimes necessary in situations where the financial affairs are particularly complex. The will or trust deed will also give details of the powers granted to the trustees. IHT trusts are normally discretionary, meaning that the trustees will be given certain latitude in order to ensure that the settlor's wishes are adhered to.

In the case of an inter vivos trust, a separate trust deed should be drawn up. You should always seek the help of a solicitor or other legal professional in doing this. The trust will then be established when assets are settled - that is, when they are transferred into trust. If you opt for an irrevocable inter vivos trust you should remember that you will lose control of the assets. This is therefore not suitable if your main asset is your home.

Inheritance Tax can cause significant financial hardship for your beneficiaries. However, with the effective use of a trust you can ensure that your assets are disbursed in precisely the way you wish - rather than going straight to the taxman.