Trusts Solicitors

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.  With many years of experience, we can assist you further with any other questions you may have, 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.

What are the benefits a trust can offer?

The main benefits to setting up a trust include:

  • If you wish to give away assets a trust enables you to transfer the ownership of the assets out of your estate but at the same time remain in control of the destination of the funds.  On an ongoing basis, you will therefore control distributions to potential beneficiaries
  • 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.
  • If you cannot handle their affairs because they lack mental capacity
  • Saving Inheritance Tax upon your 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.

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
What are the duties of a trustee?

The role of a trustee is to hold the trust property and administer it for the benefit of the beneficiaries. The full extent of the duties of a trustee is governed by the terms of the trust instrument and the principles of common law, equity and statute.

Prior to accepting a position as a trustee, the trustee should always ensure that there is no conflict of interest between their own personal interest and that of the beneficiaries.

The Trustee Act 2000 (TA 2000) clarified the key duties of a Trustee:

  • To comply with the terms of the trust.  A trustee should fully inform himself of the terms of the trust and comply strictly with the duties and directions as set out in the trust.
  • To take control of the trust property.  A trustee should ascertain the extent of the trust property, ensure that it is vested in him and any co-trustees, and take steps to ensure its preservation.
  • To act impartially between the beneficiaries.  Trustees are under a general duty to act in the best interests of the beneficiaries, but in exercising this duty they must not allow one beneficiary to suffer at the expense of a benefit to another beneficiary.
  • To take reasonable care.  The standard of care and skill expected of a trustee varies according to whether the trustee is unpaid or professional.  Following the TA 2000, trustees owe a statutory duty of care in addition to their common law duty of care.
  • Common Law duty of care.  The trustee must show such skill and care as is reasonable in the circumstances making allowances for his special knowledge, experience or professional status. Therefore, a higher duty of care will be imposed on a trustee if he has expertise in a particular area.
  • Statutory duty of care.  Two further statutory duties were also been introduced under the TA 2000 which are designed to balance the risk the trust funds could be exposed to and to ensure trustees act prudently in looking after the beneficiaries interests.
  • Duty to have regard to the need for diversification and suitability of investments.  This duty was originally included in the Trustee Investment Act 1961 and has been retained in the TA 2000. This places emphasis on balancing risk and return across a portfolio of investments rather than looking at each investment in isolation.  When considering whether investments are “suitable”, the size of the investment must be considered as well as an appropriate balance between income and capital.  Trustees must also consider whether investments should be varied from time to time in light of changing circumstances.  Trustees must consider beneficiaries requirements.
  • Duty to obtain and consider proper advice.  Before exercising their powers of investment or reviewing the investments within the trust, trustees must obtain and consider proper advice as to how investments should be made or varied.  The exception to this is where the proposed investment is so small the cost of obtaining professional advice would be disproportionate or unnecessary. Alternatively the trustees may be suitably qualified or have expertise in a particular area to make these decisions without taking advice.  Although there is no requirement to obtain advice in writing, in practice it will no doubt be regarded as best practice to have any advice confirmed in writing to show compliance with the general duty of care.
  • Investment. The TA 2000 replaces the Trustee Investment Act 1961. Apart from the investment powers there is also a range of powers aimed at making the administration of trusts easier including the power to appoint agents, nominees and custodians, to insure property and to pay professional trustees.  The powers apply to existing trusts as well as trusts established after 23rd November 2000. The powers only apply to the extent that the trust deed permits. If the trust deed specifically restricts certain powers, the deed will overrule the statutory powers.  Under the TA 2000, a default power of investment will be given which will apply in the absence of any powers specified in the trust deed. The investment powers given will no longer be restricted to “authorised investments” and trustees will be able to invest in the same range of investments as if they were the absolute owner.
  • Duty to keep accounts.  A trustee is under a duty to keep and provide clear and accurate accounts of the trust and to provide them to the beneficiaries upon request, provided the beneficiaries are prepared to pay the cost.
  • Duty to provide information.  A trustee must produce, on request, information and documents relating to the trust when required by the beneficiaries.
  • Duty to act unanimously.  Trustees must normally act unanimously in any decisions they make, though the actual discharge of the duty itself may be carried out by less than all of the trustees.
  • Duty to consult.  In general, trustees should consult beneficiaries whenever possible and give effect to their wishes. The duty to consult can be excluded by the trust instrument and only applies to settlements made after 1 January 1997.
  • Duty to act personally. The position of a trustee is a personal one and should not normally be delegated.  Nevertheless, delegation is permitted under the Trustee Delegation Act 1999.
  • Duty to distribute. The trustees are responsible for ensuring that the trust assets are distributed to the correct beneficiary and in the correct amounts. Failure to discharge this duty can result in personal liability for the trustees.
  • Duty to register on the Trust Register:  Trustees have a duty to register the trust details on the Government Trust Register portal if the trust has any assets which give rise to some tax consequence such as Income Tax, Capital Gains Tax, Inheritance Tax or Stamp Duty Land Tax.
What trusts are available?

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 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 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.

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. Declaration of Trusts are also available to set the distribution of a property on sale where the buyers have provided different amounts towards the purchase price.

We will be able to assess which trust would suit your family situation perfectly to meet your needs and wishes.  To make your appointment to discuss setting up a trust, you can contact the team on 01329 222075 or email privateclientenquiry@warnergoodman.co.uk.

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