Setting up a trust has for many years been seen as a way for individuals to avoid paying Inheritance tax.. There are many other elements and benefits to setting up a trust, and it can be quite complex process to ensure they work to protect assets in the most tax effective way. We set out here the basics you need to know when setting up a trust, and our approachable and pragmatic team have many years of experience to assist you with any further queries, working with you and tailoring your trust towards your needs.
What is a trust?
A trust is set up to manage assets, such as cash, investments, land or buildings. A trust deed puts in place a legal framework so as to enable assets to be placed under control of individuals tasked with ensuring that the interests of all the beneficiaries are protected. A Grant of Probate is on public record while trusts remain private, and so in some circumstances it is convenient to place assets in to trust which can then be administered without waiting for Probate.
An overview of some of the key benefits that trusts can offer
The main benefits to setting up a trust include:
- If and individual wants to give away assets a Trust enables them to transfer the ownership of the assets out of their estate but at the same time remain in control of the destination of the funds and thus on an ongoing basis control distributions to potential beneficiaries
- Safeguarding assets: By using a trust assets can be protected from creditors of beneficiaries and from those who are inexperienced at managing money.
- Managing assets passed to beneficiaries who are too young to handle their affairs – control is increasingly important here as they may be insufficiently mature to cope with a windfall.
- When someone cannot handle their affairs because they lack mental capacity
- Saving Inheritance Tax on death by making early lifetime transfers in to trust for the benefit of beneficiaries
Who is involved in a trust?
There are three main parties involved in a trust; a settlor, trustees and beneficiaries.
The settlor is the person who sets up the trust and decides how the assets in that trust should be used.
The trustees are the persons who manage and administer the trust. Typically, there should be at least two trustees and no more than four. The trustees are required to manage the trust and the assets and pay any tax due, decide on the use of the trust’s assets and deal with them according to the settlor’s wishes. More details about the duties of a Trustee can be found here.
The beneficiaries are the persons who would benefit from the trust. A beneficiary can benefit in three different ways:
- Income only
- Capital only
- Both the income and the capital
Examples of trusts
In the situation that the beneficiaries of a trust are young and not able to manage their inheritance, the entitlement could be confined to income, thus preserving the capital value of the trust assets. A discretionary trust is one example of a trust, which would enable the trustees to tailor the distributions according to the needs of the beneficiaries, for example in relation to education.
A trust can also protect assets against claims by third parties. If a beneficiary of a Life Interest Trust (LIT) is declared bankrupt, the ability of the trustees in bankruptcy to access the trust fund would be confined to any income entitlement, and in the case of a discretionary trust there would be no such entitlement.
Life Interest Trusts are also often used to protect children of second marriages or children of surviving spouses where the testators fear that there may be predators ready to take advantage of the surviving spouse wealth, including local authorities charged with providing care home accommodation. Find out more about Life Interest Trust Wills, or watch the video below:
Trusts can also be used to protect assets against claims arising in divorce and to preserve entitlements to local authority funding of care for the elderly, which is dependent on recipients’ financial assets not exceeding defined levels. Again, a discretionary trust would be the appropriate way of conferring benefits but not entitlement.
Discretionary, Life Interest and Bare trusts are the main trusts available. Declarations of Trust are also available to set the distribution of a property on sale where the buyers have provided different amounts towards the purchase price.
Our experienced Private Client team will be able to assess which trust would suit your family situation perfectly to meet the needs you wish. To make your appointment to discuss setting up a trust, you can contact the team on 01329 222075 or email email@example.com.