Using Trusts to Protect You and Your Beneficiaries

Is it possible to manage your ongoing financial affairs successfully and still make use of trusts to protect you and your ultimate successors? The simple answer here is yes. Many expats believe that they don’t belong in the world of trusts and often have a rude awakening when they fail to implement adequate provisions for the protection of their wealth.

In the last two articles (here and here) we have been using the example of George, a British expat living in Thailand, and how he wants to arrange his affairs to protect his heirs from unwanted predators, whilst minimising UK inheritance tax (IHT).

George’s estate:


London house


GBP   680,000


฿34.68m

Isle of Man OPPB GBP   460,000 ฿23.46m
Guernsey savings plan USD  237,000 GBP   148,000 ฿  7.55m
International Life Insurance USD  750,000 GBP   469,000 ฿23.92m
Isle of Man Life Insurance GBP   500,000 ฿25.50m
Personal effects/vehicle etc. THB2,000,000 GBP     39,000 ฿  2.00m

Total


GBP2,296,000


฿117.11m

Less London mortgage GBP   380,000 ฿19.38m

Net Estate Total


GBP1,916,000


฿97.73m

 


Thus IHT would currently be:

Estate total:                                                                   £1,916,000

Less nil-rate band:                                                      £   325,000

Less UK non-domiciled spouse allowance:          £   325,000

Chargeable amount to IHT                                       £1,266,000


IHT payable at 40%                                                   £   506,400

 

We looked at the possibility of using trusts and saw that there was a solution which would fit part of George’s requirements. However, there are still some flaws in the trusts as proposed for George.

First, by settling assets into trust George removes them from his future use. IHT exemption may apply to those assets. However, George may not become a beneficiary of the trust. By remaining a beneficiary, George would have given assets to the trustees as a “gift with reservation”. This would not exempt the assets from his estate, making them subject to IHT.

Settling assets into trust would reduce the overall value of George’s estate, saving a substantial amount of IHT. But future asset acquisitions and growth on those assets would fall within the IHT net, adding further value to George’s estate and increasing his liability.

In order to comprehensively resolve this situation, the best approach is for George to establish his non-domicile in the UK so that liability of his estate to IHT would be nullified. In order to achieve this, George needs to prove to HMRC that he has an alternate domicile of choice to that of the UK. HMRC will not rule on an individual’s domicile unless a taxable event occurs. This can be triggered by one of two events: George’s death, or settling assets valued higher than the IHT nil rate band into trust.

It can take a great deal of time to secure a ruling from HMRC, but this is possible by using experienced professionals who specialise in these processes.

Once non-UK domicile has been established, George’s next step is to settle his entire estate into trust, thereby exempting the assets from IHT no matter what happens in the future.

This would only be in question if George changed his place of residence and potentially his domicile of choice within a “reasonable” period. If such a period was relatively short, HMRC could view his establishment of a non-UK domicile as a means of avoiding IHT. However, if the domicile of choice is genuine and George intends to stay in Thailand for life, any change would be due to future unforeseen circumstances.

Specific trust structures used by any individual need to be established on a bespoke basis because solutions will always vary for individuals. In this case George has a London property. All UK based assets are subject to IHT and it would be to his advantage to transfer the ownership of this to an offshore company, removing ownership from himself and his estate. The trust would be the owner of the company. Trustees tend to shy away from owning properties themselves as there are individual owner legal issues. The solution is easily remedied by the trust owning a company. Specific advice is required here to ensure that local laws are being adhered to and disadvantages are not being incurred such as the triggering of luxury property liabilities. Please also remember that a change of ownership will be subject to UK stamp duty.

In Thailand trusts are not recognised. This creates the necessity for ownership of an approved foreigner owned property by a company. Please note that stamp duty for ownership transfer of a property would also need to be paid in Thailand.

Once the entire process is complete and the trust established, the situation can be very fluid as assets can be bought and sold within the trust. George would also be a bona fide beneficiary and as such could make requests to the trustees for distribution of funds for his living or other expenses.

As I previously stated, the practical operation of trusts these days is nothing like the old wives’ tales that once you have settled assets into trust you have effectively kissed them goodbye.

In this solution George has established his alternative domicile of choice in Thailand such that when he finally dies HMRC will not challenge this.

The trust will then be subject to George’s letter of wishes which may include many different requests. These will not necessarily all relate to George’s death but rather to the circumstances he outlines and events he would like to trigger specific actions.

Different nationality expats will need to view their situation according to their own circumstances and that of their own domicile. The best action you can possibly take is to consult me as soon as possible in order that you may assess your own position.

Questions to the author can be directed to PFS International on 02 653 1971 or email to enquiriesthailand@fsplatinum.com

Andrew Wood has been an expat in Asia for 34 years and is Executive Director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles which cover the complete A-Z of financial planning are available to readers on request.

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