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What Is A Trust?

A trust is the formal transfer of assets, whether it be property, shares or cash, to another, whether it be an individual or a small group of people. It can also be made to a trust company with directions to hold the assets for the benefit of others.
Set up a trust and you could save a vast amount on inheritance tax in the future. Your family will directly benefit, maintaining more of your estate and asset value.
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The cost of setting up a trust can greatly outweigh the amount of inheritance tax due. Careful planning can ensure your family keep as much of your assets as possible.
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Quite simply you and your family can be saved a lot of stress, time and money. Trusts help avoid probate, manage assets, protect from creditors and tax related issues.
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The details of the arrangement are usually documented in a ‘trust deed’ and the assets placed in the trust are called the ‘trust fund’. There are several different types of trusts and they are each taxed according to different rules. Setting up a trust can be very complicated and it is advised that you use a solicitor to avoid costly mistakes.
People who are involved in a trust are:

  • The ‘settlor’ – the person putting assets into a trust
  • The ‘trustee’ – the person in charge of managing the trust
  • The ‘beneficiary’ – the person who benefits from the trust

Settlor

The settlor makes decisions on how the assets held in trust should be used. This is usually documented in something called the ‘trust deed’. It is possible that the settlor can benefit from the assets held in trust. This is called a ‘settlor-interested’ trust and must follow special tax rules.

Trustee

Trustees are the legal owners of the assets held in a trust. Their role is to manage the assets according to the settlor’s wishes, which should be documented in the trust deed or their will. They should manage the trust on a day-to-day basis and pay any tax due and often, decide on how to invest or use the trust’s assets in the interest of all involved. It is possible to change trustees as long as there is always one individual performing the role.

Beneficiaries

There could be multiple beneficiaries of a trust; a family or group of siblings for example. They might benefit from: the income of a trust such as rental income from a property in trust, the capital from any proceeds made by the trust from investments. Sometimes beneficiaries can benefit from both the income and capital of the trust.

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Why Set Up A Trust?

Trusts are set up for many reasons which could include:

To protect your family assets
To keep control of your assets
To protect the assets of a minor
To protect the assets of a person without capacity
To pass on assets whilst you are still alive
To distribute assets when you die (a ‘will trust’)
To protect assets under the rules of inheritance when someone dies without a will (intestate)

A trust can be especially beneficial if you are responsible for a minor with a mental health condition or learning disability and they may be unable to manage financially after you die. Trusts can also protect a person lacking capacity, who’s claiming state benefits, such as Disability Living Allowance (or Personal Independence Payment), or getting cash help from their local social services department. Payments can be made to trustees who will act according to the rules of the trust.

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Bare Trusts

Bare trusts are often used to pass down assets to minors. Trustees oversee them until the beneficiary is of age to do so themselves.

Assets put in a bare trust are held under the name of a trustee until the beneficiary has the right to claim possession of all capital and income from the trust. This occurs at age 18 or over (in England and Wales), or 16 or over (in Scotland). Any assets set aside by the settlor will pass directly to the beneficiary.

Interest in Possession Trusts

This is a trust where at least one beneficiary has the right to receive an income generated by whatever is being held in the trust (if trust funds are invested in shares for example, the beneficiary could receive the profit) or the right to enjoy the trust assets for the present time in another way (such as living in a home held in trust). The beneficiary has the right to enjoy the trust property and are said to have an ‘interest in possession’. They might also be described as an ‘income beneficiary’, or ‘life tenant’.

A trust can give the interest in possession to a beneficiary for a fixed period, for an indefinite period or as is often the case, for the rest of the beneficiary’s life. A life interest trust is the most common example of an interest in possession trust.

Discretionary Trusts

A Discretionary Trust is when money or other assets from your Estate are left in Trust which is to be managed by an appointed Trustee or Trustees, who decide which people are to become beneficiaries, when they should receive any inheritance and how.

Depending on the terms trust deed, trustees can make decisions on:

  • How much is paid (income or capital)
  • Which beneficiary is paid
  • How often payments are made
  • Conditions attached to the trust regarding the beneficiaries

Discretionary trusts are often set aside for:

  • Future contingencies such as a grandchild who may need more financial help in the future than other beneficiaries
  • Beneficiaries who are underage or lack the capacity to deal with money themselves

A Discretionary Trust is particularly useful if you are unsure of how to distribute your Estate or if that decision would be directly influenced by other circumstances that might arise in the future such as the birth of more grandchildren or a sudden change of circumstances.

Accumulation Trusts

An accumulation trust is a trust in which the trustee does not distribute the income from the trust, but gathers the income and any profits from any sale of trust assets and holds them in the trust, until the trust expires. The specifics will stated in the creating document.

Mixed Trusts

Mixed Trusts are a mixture of different types of Trust. Some assets in a mixed Trust may be set aside as an Interest in Possession Trust. Other assets may be treated in the manner of a Discretionary Trust. These Trusts are often used for the benefit of family member beneficiaries who all reach adulthood at different times.

Settlor-Interested Trusts

Settlor-Interested Trusts are Trusts in which the settlor, or their spouse/civil partner may benefit from the Trust. An example of this would be a Trust in which the settlor knows that at some point in the future, he or she will be incapacitated and therefore puts assets in a Trust for his or her own future care and/or for the income of the spouse.

Non-Resident Trusts

This is a trust where the trustees are not resident in the UK for tax purposes. Tax rules concerning non-resident trusts are very complicated.

Non-resident trusts are usually set up if:

  • None of the trustees reside in the UK for tax purposes
  • Only certain trustees reside in the UK and the settlor was one of the following:
    • not resident
    • not normally resident
    • domiciled in the UK when the trust was set up or funds added

Parental Trusts For Children

As the title suggests, these are trusts set up by parents for children under 18; minors who have never been married or in a civil partnership. They’re not a category of trust in their own right but will be either:

  • A bare trust
  • An interest in possession trust
  • An accumulation trust
  • A discretionary trust

Trusts For Vulnerable Beneficiaries

Some trusts are set up specifically to maintain vulnerable people, disabled people or children. These trusts get special tax treatment and are called ‘Trusts for vulnerable Beneficiaries’.

Who is a vulnerable beneficiary?

A vulnerable beneficiary is

  • Someone under 18 whose parent has died or
  • A disabled person who is eligible for any of the following benefits (whether or not they receive them):
    • Attendance Allowance (either the care component at the middle or highest rate, or the mobility component at the highest rate)
    • Personal Independence Allowance
    • Increased disablement pension
    • Constant Attendance Allowance
    • Armed Forces Independence Payment

A vulnerable beneficiary might not be able to manage their own finances and legal issues because of a mental health condition. A medical professional will be able to do it for you if a person’s condition is covered by the Mental Health Act 1983.

Frequently Asked Questions

Should you have any questions related to trusts please contact us for more info.
01. How do trusts work?
A trust enables a person (the ‘settlor’) to give assets to another party (the ‘trustee’) to look after, to benefit of one or more persons (the ‘beneficiaries’) in the future. The settlor can appoint several trustees or just one. They can include themselves. There can also be more than one beneficiary. They could receive an income from a business being held in the trust. They could receive capital which could be in the form of cash or shares. Or, they could receive both income and capital from the trust. Some beneficiaries may not benefit at all. When setting up the terms of a trust (the ‘trust deed’), the settlor can choose to keep control of certain assets themselves and to give the beneficiaries have a right to others. To maximise inheritance tax effectiveness, the settlor should not be a beneficiary and neither should their spouse or civil partner while the settlor is alive
02. How much can I place in trust?
You can place any value of assets in trust but if the value exceeds your nil rate inheritance tax band (currently £325,000) you may have to pay IHT at a rate of 20% on the amount over that £325,000. You can make regular contributions into the trusts well as one off lump sums. Any Inheritance tax and/or capital gains tax you have to pay will depend on the type of trust you have, what you contribute and its value.
03. Can trusts avoid inheritance tax?
If the trust you use is effective for inheritance tax purposes and certain criteria are met, there is a chance inheritance can be avoided or reduced. Inheritance tax should be reduced if you place assets into a trust and then live for seven years or more after it was made. After the seven years the sum total of the assets gifted is not liable for IHT and no longer counts towards the value of your estate. The lower the value of your estate, the lower the potential inheritance tax bill. If you have a life insurance policy which pays out in the event of your death IHT can be avoided. If the policy is put into a trust, when you die, the proceeds will pay out to the trust instead of your estate. Tax rules change regularly so having a financial planner to take care of your trusts will be beneficial.
04. Can trusts help protect my assets?
Many trusts can be used for asset protection purposes. Some people have beneficiaries who might not be in a position to handle valuable assets, maybe because they are children or vulnerable in other ways. Also, big life changes such as a divorce or bankruptcy can render assets at risk. In these circumstances a trust can help. If your trustees are in a position to decide which of the potential beneficiaries should benefit, when and with how much, then the assets held in the trust should be safe from claims on matrimonial disputes, more so than if you handed any assets over outright.
05. How do I set up a trust?
You should seek advice from a specialist. There are various types of trusts which alll have different tax allowances. Plus your trust should be tailored to match your aims and objectives. It also depends on what you intend to put into the trust, what the tax consequences would be and who you name as the beneficiaries and trustees.
06. Can a beneficiary also be a trustee?
Yes: although appointing a beneficiary as a trustee could create a conflict of interest if that person was thought to be using their position to influence the other trustees for their own gain. It is advisable that the two roles don’t mix or at the very least a solicitor is appointed appointed as well, to provide independent and impartial advice.
07. Can a trustee be held responsible for any mistakes?
Yes. Anyone acting as a trustee needs to be mindful of the risk they are taking on. If a trustee does something other than perform the duties specified in the trust deed, then they can be held liable for any loss or damages suffered as a result. Trustees, especially those of family trusts, should seek professional advice in order to fully understand their obligations and to ensure that they manage the trust fund properly and protect themselves from personal liability.

Who Can Be My Trustees?

It is up to you to choose people who you want to act as your trustees. Quite often they will be family members or close friends who can be trusted with your affairs. You should put a lot of consideration into deciding who to ask. Also, it is important that you ensure that they are happy to take on the responsibility.
You should name at least two trustees, but no more than three or four. There are companies who can act as trustees. These could be banks or a firm of solicitors , however they will charge a fee to do so.

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How Much Does It Cost To Set Up A Trust?

If you Instruct a solicitor to set up a trust for you, it can typically cost around £1,000, sometimes more. However, a solicitor is highly advisable as it ensures that you avoid costly mistakes further down the line. If a legal professional carries out the paperwork, there will be no ambiguous or misleading information contained. There are certain charities that run schemes whereby contributions are made towards the costs for parents setting up a trust for a disabled child.

Trusts are a small part of planning your financial future for both yourself and your family. We have comprehensive guides on future planning.






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