The guide top ten: Learn how you can gain the maximum benefit from trusts

Their tax treatment was tightened in 2006, but trusts are still an important tax planning tool. Here, Angela McMahon, a senior solicitor at Murray Beith Murray in Edinburgh, presents her guide to taking advantage of trusts.

1 TRANSFER TOOLS Contrary to common belief, trusts are not set up only by wealthy families or for the avoidance of tax but are instead used by many individuals who wish to transfer property out of their estate (and their control) but do not want to make gifts outright.

2 TAX TARGET? Following the controversial changes to the tax treatment of trusts in the Finance Act 2006, it is hard to imagine any further tightening of the trust tax rules featuring in the forthcoming Budget, particularly given the impact any such change would have on the electorate. However, changes in recent years have frequently come out of the blue, so it may be advisable to act now.

3 REMEMBER YOUR GIFTS Before you set up a trust consider the value of gifts made within the previous seven years, because any gifts falling within the normal expenditure out of income exemption or annual allowance of 3,000 need not be taken into account. It is advisable to transfer assets valued at or below your available inheritance tax (IHT) nil rate band allowance (currently 325,000) to prevent any immediate IHT charge. Any previous chargeable gifts are deducted from the available nil rate band allowance. There will be no IHT charge provided the value of the trust fund remains below the IHT nil rate band allowance.

4 DOUBLING UP Depending on the value of the funds to be settled in trust, in the case of married couples both husband and wife should consider settling funds in trust to fully utilise their available nil rate band allowances.

5 WHAT TYPE OF TRUST? This will be principally determined by your objectives in settling funds or property in trust. You may do so to pass assets to your children and grandchildren when they are of an age to be more financially responsible, or to a vulnerable relative requiring ongoing care.

Alternatively, you may wish to ensure that, after death, your surviving partner continues to live in the family home for his or her lifetime and that on his or her death, the property passes to your children.

6 LIFE OR DEATH? Trusts can be set up either in lifetime by a trust deed or on death in terms of a will. For IHT purposes, the assets settled in new lifetime trusts no longer form part of your personal estate (provided you do not benefit from the trust).

7 PEOPLE TRUST Careful consideration should be given to whom one appoints as a trustee or trustees, because they will control the management and investment of the trust fund. Depending on the trust provisions, trustees may make decisions about the ultimate timing of any advances to beneficiaries of the trust. Majority rules under Scots law and it is often advisable to have an odd number of trustees.

8 WISH LIST Any specific guidance of your intentions in settling the trust should be given to the trustees in a letter of wishes, regularly reviewed to ensure it reflects current wishes. However, do keep in mind that a letter of wishes cannot be treated as binding on the trustees.

9 RECORD KEEPING As a matter of good practice, decisions made by trustees should be recorded in formal minutes.

The trustees should meet on a regular basis with their legal or financial advisers perhaps at the time of approving the trust accounts.

10 PENSIONS AND INSURANCE Death benefits payable under life assurance policies or pension plans should be written in trust to prevent the benefit forming part of the deceased's personal estate and being subject to inheritance tax (depending on the amount of the benefit). Try to ensure that the nomination form recording the beneficiaries and their respective shares is regularly reviewed.