A trust is a legal arrangement which allows for the transfer of property or assets to a middle man, who then holds it for the benefit of a third party.
There are 3 distinct legal persons when a trust is set up:
- the settlor is the individual who owns the assets and wants to place them in the trust
- the trustee is the person or organisation that manages the assets placed into the trust by the settlor
- the beneficiary is the person who is going to benefit from the trust when they receive the assets or income from the assets.
Assets such as money, insurance policies, land and property can be placed into trust. The settlor initiates the relationship between the 3 individuals by making a declaration of trust, which can be an “expression of wishes” or a more formal deed, which establishes who they want the trustee or trustees to be, what the assets of the trust are, and who the beneficiaries of the trust are.
The trustee can be anyone (as long as they are an adult) that the settlor chooses, from friends and family to financial advisers and professional trustees, even the beneficiary themselves, although this could present a conflict of interest. It is also quite common for a settlor to act as the trustee themselves.
Trusts are not solely related to death and are often used and set up outside of wills. Beneficiaries can receive their assets immediately after the trust term or purpose ends (usually with the death of the settlor or when the beneficiary reaches a certain age) without the long probate process. Trusts are private and unlike wills, the ongoing management of a trust does not generate a public record.
Trusts also allow the settlor to:
- transfer assets in a tax-efficient way
- protect children who are too young to handle their own affairs
- protect people who can’t handle their affairs because they do not have the capacity to do so
- allow income and capital to be used in a planned, protected way
- protect their estate, particularly with regards to inheritance tax planning.
Types of trusts:
Discretionary trusts. The trustees are the legal owners of the assets and are responsible for administering the trust. They can use their discretion, within the range of powers set out in the trust deed, about how to use the trust’s income or how to distribute the capital. This type of trust is useful for Trustees have a degree of flexibility to use the assets in a way that will benefit each beneficiary the most. Examples include paying for school fees when children are young, or a deposit for a house when they are older or paying for care for a sibling that needs more support than others.
Accumulation and maintenance trusts. The trustees are allowed to accumulate income within the trust and add it to the trust capital, or can use their discretion to make maintenance payments to a beneficiary. These type of trusts are useful for keeping capital and growth intact until a beneficiary comes of age or otherwise becomes legally entitled to the trust assets, or for paying for maintenance costs (e.g. education) for a child until they come of age.
Interest in possession trusts. The trustees pass on the income from the trust to the beneficiary as it arises for the beneficiary’s lifetime, but not the capital, which passes to another named individual known as the ‘remainderman’. These types of trusts are useful for providing a lifetime income for a beneficiary whilst keeping the assets out of their estate.
Bare trusts. Assets in a bare trust, sometimes called a simple trust, are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). These types of trusts are useful for keeping assets and income safe until children or grandchildren reach the above ages. In some circumstances, they can also be used to reduce inheritance tax for the full amount, as long as the person making the transfer survives for 7 years after making the transfer.
Other types of trust include:
- settlor-interested trusts
- mixed trusts
- parental trusts for children
- non-resident trusts
- trusts for vulnerable people.
Lifetime trusts. While most trusts can be set up while the settlor is still alive, there is another type which is specially designed for those who want to make use of their assets while they are alive. These lifetime trusts, also known as property protection trusts or asset protection trusts, are designed to allow you to gift your home to the trust, so you effectively don’t own it anymore, which takes it out of your estate, but you remain living in it. However, it is possible that this type of trust can be viewed by local authorities as deliberate deprivation of assets (reducing assets in order to lower the amount a person will be charged for care and support), and they may refuse the fund care home fees as a result.
Anyone who has life insurance should consider getting their policy ‘written in trust’. The benefit of this is twofold: any pay-out is paid directly to beneficiaries, rather than included in the estate, which may affect the tax due, and secondly, the payout won’t normally have to go through probate, so your beneficiaries won’t have to wait so long before they receive the money.
For more information on Trusts, please contact us.