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A trust is a legal arrangement for managing assets. It involves three separate parties:
- The settlor: the person creating the trust and providing the assets. The settlor decides how the assets in the trust should be used – usually set out in a trust document;
- The trustees: the people (or company) chosen to manage the trust. They become the legal owners of the trust assets and are responsible for running the trust, paying any tax due, and deciding how to invest or use the assets in accordance with the settlor’s wishes as set out in the trust document; and
- The beneficiaries: those who will benefit from the trust assets. The beneficiaries may be specific named people, or a defined group of people, charities or corporate bodies.
Why set up a trust?
Trusts are a very useful mechanism for passing on assets (including cash, property, shares or other investments, land, personal belongings, insurance policy benefits) whilst enabling the trustees to exercise some control and flexibility over their use. Trusts are set up for many reasons, for example:
- to protect assets for someone who can’t manage their own affairs because they are too young, vulnerable or incapacitated;
- to protect assets from divorcing spouses or business creditors;
- to protect someone’s entitlement to state benefits where they may be suffering from a mental health condition, physical disability or learning disability;
- to ensure that a current spouse and children from a previous relationship are all cared for;
- to make a gift to someone with certain conditions attached to it;
- to avoid inheritance tax for family members and their estates.
Types of trust
There are different categories of trust that can be set up depending on how you want to control your assets, as well as whether you want the trust to take effect straight away, or on your death (known as a ‘will trust’). Some of the most commonly used types are:
- bare trusts: simple trusts where the beneficiary is absolutely entitled to both the income and capital of the trust on reaching 18 years of age. Often used to provide for minor children, where the trustees manage the trust assets until the child turns 18 years old.
- interest in possession trusts: these comprise of two categories of beneficiaries – income beneficiaries and capital beneficiaries. The income must be given to a specified beneficiary who has a fixed entitlement. If the income beneficiary is entitled to the interest from the trust for the rest of their life, they are called the life tenant and the trust is called a life interest trust. These are often used in wills when someone dies leaving a surviving spouse. In this case, the interest in possession ends on the death of the life tenant (the spouse), with the capital beneficiaries receiving the entirety of the trust property at that point.
- discretionary trusts: the trustees have discretion to decide which of the beneficiaries and in what shares to distribute the income and capital of the trust to, guided by a letter of wishes prepared by the settlor. Discretionary trusts are also commonly used in wills, where the intended class of beneficiaries has been identified, but not the proportions in which they should receive the trust assets or how much help they will need in the future. This type of trust allows the trustees flexibility to consider the relevant circumstances before making any distributions to the beneficiaries.
- charitable trusts: the trustees may only use the income and capital to benefit charities or purposes that are recognised as charitable in law. Gifts to such trusts are free of capital gains tax and inheritance tax.
- vulnerable person’s trusts: also called a trust for disabled beneficiaries – someone who is otherwise unable to look after the assets in the trust themselves, because they are mentally or physically disabled. These trusts can have special tax exemptions.
The tax liability of a trust depends on which type of trust you use. The trust may have to pay income tax and the trustees may need to complete tax returns. There also may be inheritance tax and capital gains tax implications to consider.
How can we help?
Our experienced trusts and estate lawyers can help you with:
- creating and terminating trusts
- advising on trustees' duties
- advising beneficiaries of trusts
- trust administration and taxation
- resolving disputes
- acting as professional trustees
- independent examination of charity accounts
- using trusts as part of estate planning
Together with our team of probate and estates solicitors, we can also advise you on wills, gifts and estate planning, and all aspects of tax law.
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