For those looking to protect their wealth and pass it down to the next generation, the best family trust to use might not even be a trust at all.
Instead, there is something far simpler which doesn’t involve complex legal structures or high levels of taxation.
Let me explain.
Why this is the best family trust
Gifting money or assets directly to your loved ones whist you are alive or leaving it to them via your Will can mean Inheritance Tax is due.
Also, if your loved ones were to divorce from their partners in the future then half of the inheritance could go with the ex-son or daughter-in-law.
So many people use trusts as a way of ensuring ONLY their loved ones can benefit.
The problem with using trusts created by solicitors is that they can be difficult to get your head around, especially for your loved ones once you have gone.
There is regular administration work that needs to be carried out by the trustees and the trust may need to be registered with the tax office, with annual tax returns needing to be completed.
To keep things simple, you may find a pension is the best family trust.
A defined contribution pension, also known as a personal pension can be left to whoever you wish.
By completing an ‘expression of wish’ form you can nominate who gets the value of your pension at the date you die. You can also split it between as many people as you want.
As your pension is usually invested you will never know for sure how much your loved ones will get as it will depend on the value at the time of death.
The great thing about a pension is that if you die before age 75, in most cases your beneficiaries pay no tax on withdrawals from the pension. That’s no Inheritance Tax and no Income Tax.
If you die after age 75 then there is still no Inheritance Tax to pay but your beneficiaries would pay Income Tax on any withdrawals they make at their marginal rate.
The beauty of a pension on death and one of the reasons why I think it’s the best family trust is that your beneficiaries who inherit your pension can also then pass it on to the next generation on their death, with the same tax rules at death pre and post age 75.
Let’s look at an example.
David is 68 and retired at age 60 when his pension value was £600,000. Over the last 8 years David has been withdrawing £25,000 per year from this pension. At this point the pension is worth £603,000 after some decent investment growth.
Sadly, David dies at age 68 leaving his pension to his two daughters Rachel (31) and Lucy (28) 50/50.
Both Rachel and Lucy inherit a pension worth £301,500 and do not pay any tax at the point of receipt.
As David died before age 75 Rachel and Lucy can make unlimited withdrawals from the pension tax free. So they could take out the whole £301,500 in one go or they could take a series of payments over time.
Rachel decides to leave the money invested in a pension so it grows over time and is ready to be her pension when she eventually retires.
Rachel is very successful during her working life and finds she never actually needs the pension from David so leaves it as a pension ready for her child Matthew (David’s grandson) to inherit.
Check you qualify for the best family trust
The passing of a pension down the generations only really works if you have a pension that facilitates beneficiary drawdown.
Most personal pensions, especially ones set up via your work will only give you the option of leaving the pension as a lump sum pay-out to your beneficiaries. They will not allow you to keep the money inside a pension and pass it down the generations like the example described above.
If you want to use your pension like the best family trust then you need to check what beneficiary options there are with your current pension provider.
If the pension was one you have set up yourself or you have left the company that set it up, then you may want to consider a transfer to a pension like a Self Invested Personal Pension (SIPP) which is likely to have far more flexible death benefit features.
If you end up inheriting a pension yourself, what you don’t want to do is to just take out all the money as one lump sum even if it is tax free, as this money will then immediately form part of your estate and could be subject to Inheritance Tax on your death.
The disadvantage to passing your wealth down the generations via a pension is that it could still be subject to divorce proceedings meaning some could be lost on a split.
However if you wanted to go a step further and provide full protection you could in fact leave your pension to a trust set up via a solicitor but this does of course add some layers of complexity.
In any of these scenarios it’s best to seek professional advice so you and your family can benefit from the full protections and tax relief available.
If you would like a review of your pensions and legacy planning please schedule a no obligation free 15-minute call.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
