A Question of Trust

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26 November, 2020

Victoria Motley

Many people are confused by trusts and think that trusts are just for the very wealthy. In reality, trusts can be a very useful way of providing for your family and protecting assets.

What is a Trust?

A trust is any arrangement whereby someone (the Settlor) gives money or assets (the Trust Fund) to a group of people (the Trustees) to look after for the benefit of another person or group of people (the Beneficiaries). The Settlor sets out in a Trust Deed how he wants the trustees to deal with the Trust Fund.

Anything can be placed into a trust but it is usually money, property or shares. The Trustees are then responsible for looking after the Trust Fund for the benefit of the Beneficiaries.

Who can benefit from a Trust?

Trusts can be set up to benefit anyone. They can be for specific named people or can be for a group of people (e.g. your grandchildren). They can also be used to benefit charities.

What are the types of trust?

There are a number of types of trust. Trusts can be set up during lifetime or by Will. They can be for a specific purpose or to deal with specific assets. There are some types of trust that can only be set up in a Will. The main types of trust are:

Bare Trust

This a simple type of trust. The Trustees hold the Trust Fund for a named beneficiary. The Beneficiary is entitled to all of the trust fund. This type of trust is often used for children until they turn 18 or for personal injury awards.

Interest in Possession Trust

A named beneficiary has the right to receive income from the Trust Fund. Other beneficiaries will get the capital when the right to receive the income comes to an end. If set up in a Will this type of trust is known as an "Immediate Post Death Interest Trust".

Discretionary Trust

The Trustees decide when to pay income or capital and to which beneficiaries. The Trust Deed will name the beneficiaries or groups of beneficiaries who could potentially benefit from the trust. This is the most commonly used trust for lifetime wealth planning as it is the most flexible.

Trusts for Vulnerable People

These can be set up in lifetime or in a Will. They are for people who qualify for certain disability related benefits or for those who lack capacity to manage their own affairs. In a Will you can also set up a trust for children under 18. These trusts have special tax consequences.

Do Trusts pay tax?

Trusts pay income tax, capital gains tax and inheritance tax. The Trustees are responsible for completing tax returns and making sure that any tax is paid. The amount of tax payable and the occasions that tax returns need to be made will depend on the type of trust and the assets or investments held.

Who can be a Trustee?

The Trustees can be anyone who the Settlor trusts to look after the Trust Fund for the beneficiaries and can include the Settlor. Trustees do not have to be professionals but it can be useful to have a professional trustee (e.g. a solicitor) for complex trusts or where independence is important.

When should I consider using a trust?

There are lots of situations where a trust can be useful, some of the most common are:

  • If you have pensions or life assurance policies and want a more flexible vehicle to hold the funds for the benefit of your family after your death.
  • If you have remarried and want to provide for your spouse and protect your assets for your children.
  • If you have a vulnerable beneficiary who would not be able to look after assets for themselves
  • If you have beneficiaries who may receive state benefits and support, including long term care. A trust can enable you to make provision for them without affecting the financial support that they receive.
  • For beneficiaries who are likely to be financially imprudent
  • If you are receiving compensation for a personal injury protecting the award in a trust can make sure that you do not lose entitlement to state benefits and support
  • If you want to give assets away in your lifetime but do not feel that your beneficiaries are ready to receive the money yet

What can I put into a trust?

The assets held in the trust will depend on the type of trust, the purpose of the trust and the needs of the beneficiaries. Anything can be held in a trust but commonly trusts hold property, shares, cash accounts or other investments. Trusts can hold just one item or can hold a mixture of different types of assets.

When should we take advice about a trust?

You should take advice before setting up a trust so that you are sure that you have the right kind of trust for your needs and that you really need a trust. Trustees should take advice on investing their trust fund and on any tax requirements. Trustees should also take advice if there needs to be a change of trustee and before making any changes to the trust or paying assets out of the trust.

For more information contact Victoria Motley in our Wills, Probate, Tax & Trusts department via email or phone on 01772 220 022. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

Learn more about our Wills, Probate, Tax & Trusts department here

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