Guide to Trusts
If you have assets that you want to set aside for your loved ones, you may consider setting up a trust.
Understanding the different types of trusts and how they are designed to benefit you can sometimes be overwhelming. The aim of this guide is to provide you with clear, simple advice as to whether setting up a trust is the right thing to do in your individual circumstances.
What is a Trust?
A trust is a legal arrangement in which ‘trustees’ are given a responsibility to deal with trust assets such as land, money or buildings.
You can put specific assets (money or property) into the trust at the time of creation and/or during your lifetime. You can add more to the trust whenever you like.
You can also set out in the trust deed exactly what you want the trustees to do with the assets or you alternatively do provide guidance to the trustees in a separate document.
Commonly, trusts are set up in wills to manage inheritance on a child’s behalf or during a person’s lifetime for either tax purposes or to provide for an incapacitate/disabled beneficiary.
Why should I create a Trust?
Trusts can be used for a variety of situations. These include;
- To protect your assets
- To make provision for children
- To pass on your assets on your death
- To obtain certain tax benefits
- To provide for incapacitated/disabled persons
What is the role of the Trustees?
They are able to deal with the trust assets as legal owners of those assets.
Trustees will usually manage the trust on a day to day basis like paying any tax liabilities of the trust, making decisions as to how best to invest trust assets and how those assets should be applied for the benefit of the beneficiaries.
What can be included in a Trust?
The assets within a Trust are known as the “trust property.”
This can include;
Other personal property like jewellery or antiques can also be put into trust – these are usually referred to as chattels.
Who benefits from the Trust?
The trustees hold this property on trust for one or more “beneficiaries.” These can be a group of people who benefit from the trust as what is known as a “class of beneficiaries.”
The beneficiaries have the benefit of the trust property. The amount of their benefit and whether they benefit from the income or the capital of the trust is dependent on the terms of the trust.
The person who makes a trust can also benefit from the assets within their trusts and these are known as “settlor interested trusts” (see below for more information under “Other types of Trust”).
Trusts commonly found in wills
Before setting up any type of trust it is advisable to seek advice on the benefits of setting up such a trust, not only in relation to how you would like it to provide for the particular people or organisations you would like to benefit from it but also in relation to the potential tax implications of such a trust.
Life interest Trust: This is usually set up when the person making a will wishes to leave their estate (usually the family home) to their spouse for the duration of the spouse’s life. The spouse will be entitled to the income generated from the trust assets for life but will not be entitled to the capital value.
If there are children in the marriage, they could inherit the capital when the surviving spouse dies.
The trustees may be given more flexible powers to advance some capital to the settlor’s spouse under this type of trust should that spouse need it during their lifetime.
Contingency trusts: This is usually a gift within a will dependant on the beneficiary attaining a certain age.
Under this trust, the trustees have statutory powers to advance income and capital to the beneficiaries.
Discretionary Trusts: The trustees exercise their discretion as to how the trust income and capital should be used and how much should be advance to the beneficiaries at any given time.
Nil Rate Band Discretionary Trusts: The Nil Rate Band (“NRB”) is the threshold for the amount of money in your estate that will not be subject to Inheritance Tax. The current NRB is £325,000. Any assets over this value are currently taxed at 40%.
These trusts are less popular now following the introduction of the transferable NRB between spouses. Spouses now automatically have the benefit of each other’s NRB which means that they have a NRB between them of £650,000 before any inheritance tax is payable.
These trusts can still used by businesses/individuals as a means of holding assets which could qualify for certain other tax reliefs.
Bare Trust: These are created to give the beneficiary an immediate right to the trust assets. The beneficiary is entitled to take the benefit of the income and capital of the trust assets at any time.
Other types of Trusts
Parental trust for children: These can be set up to provide for minor, unmarried children of the person making the trust.
These can take the form of a bare trust, a life interest trust, or a discretionary trust.
Trust for vulnerable people: A vulnerable beneficiary is usually either mentally or physically incapacitated or a minor who has one deceased parent. These types of trust usually have tax advantages.
Charitable Trust: This is usually set up to benefit a specific cause or purpose which will benefit a large amount of people. It is viewed as a trust for the benefit of the public and as such has certain tax advantages, specifically in relation to income tax.
Trust for business: There are many trusts that you can set up
during the course of a business such as, employee benefit
trusts and investment trusts.
Contact a Trusts Solicitor
This guide is meant to be a helpful overview on trusts only. It is essential that you take legal advice on what type of trust will meet your own individual needs and intentions especially as the tax consequences of different trusts can be vary widely. If, having read this guide, you feel you would like to seek further advice on trusts you should contact us.