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A Question of Trust?
What is a Trust?
A trust is a legal mechanism where an individual (called the “truster” or “settlor”) transfers money or property to a third party (called the “trustees”) to hold for the benefit of one or more beneficiaries.
The trustees are responsible for looking after the trust assets and generally administering the trust in the best interests of the beneficiaries. The trustees must abide by the terms and conditions set out in the Trust Deed which is the legal document establishing the trust. These rules are fixed by the settlor at the outset and they stipulate such things as who the beneficiaries are, what kind of rights they have in the trust fund, and when they are entitled to receive income or assets from the trust.
Why set up a Trust?
Trusts can be useful for many reasons, for instance:
- Protecting vulnerable beneficiaries
It may be appropriate for a trust to be set up by a parent for a disabled child so that assets are not passed to the child outright. By doing this it is possible to preserve the availability of means-tested benefits or other state awarded financial assistance. - Safeguarding young beneficiaries
Trusts are frequently established in Wills in order to protect assets keep assets safe for beneficiaries until they reach a certain age. - Mitigating Inheritance Tax liabilities
Establishing a trust during your lifetime can reduce the value of your personal estate on your death. You can gift assets to the trust you have set up, and this can lessen your final Inheritance tax bill. - Residential care cost planning
Proper use of trusts ensures you can pass your money and property to the next generation. - Personal injury trusts
These trusts are set up to hold funds awarded by a court as a result of an accident or negligence, or as a result of an out of court settlement reached with the other party. Putting the funds in trust means that state benefits are not affected, particularly important where the settlement is because of serious injury.
Types of Trust
There are a number of different types of trust and which is the right one for any particular individual will depend on their specific circumstances. Our solicitors can help you figure out what kind of trust is best suited to your needs.
The main types of trust are:
- Bare or Absolute Trust
Assets are held by the trustees but an adult beneficiary (over 16 in Scotland) has the right to demand the trust assets at any time. - Liferent Trust (also called an Interest in Possession Trust)
There are two sets of beneficiaries in this kind of trust, called the “Liferenter” and the “Fiar”. The “Liferenter” has the right to “enjoy the fruits” of the trust. This means that they have the right to the income arising from the capital held in the trust, for example bank interest, rental income, or dividends. A Liferenter also has the right to occupy a property owned by the trust. The Fiar has the right to the trust capital when the trust comes to an end. This is most commonly on the death of the Liferenter. This type of trust is very popular in blended family situations and in care cost planning because it allows support to be given to the Liferenter but the capital is effectively ring-fenced for the ultimate beneficiary, the Fiar. - Discretionary Trust
This is the most flexible kind of trust and allows the trustees to adapt to changes in the personal circumstances of the beneficiaries and to changes in the economic climate such as the stock market. This can be particularly important as many trusts are designed to last for a long period. The trustees have a lot of power in a Discretionary Trust so it is crucial that the person setting up the trust has full confidence in them. Since a Discretionary Trust is so flexible, the Trust Deed is usually accompanied by a “letter of guidance” written by the settlor describing how they would wish the trust to be managed, who should benefit and when. Such a letter, while not legally binding on the trustees, is important in giving them a “heads up” as to what the settlor intended, vital if the trust is to continue after the settlor’s death.
In addition, trusts can be set up either during someone’s lifetime or on their death, in a Will. Trusts can be set up to benefit primarily close family, including descendants not yet born, or to benefit the wider public, such as in the case of charitable trusts.
Regulation, Administration and Tax Implications
Trusts must comply with certain reporting requirements such as registration with HM Revenue & Customs’ Trust Registration Service (https://www.gov.uk/guidance/manage-your-trusts-registration-service) and there may be a need to prepare annual tax returns and accounts.
Whilst trusts can be used to pass on wealth to future generations in a tax efficient manner, they are subject to a complex tax regime of their own.
It is therefore essential to get advice on these matters from a suitably qualified professional. Our solicitors can help you navigate the maze of rules and regulations and can be there for you throughout the lifetime of your trust, from creation (including preparation of the Trust Deed), to dealing with compliance issues and giving advice on the trust administration, all the way through to the final winding up of the trust and the distribution of assets to the ultimate beneficiaries
Find out more how we can help here, or by contacting us here on on 01224 332400.
