Untangling trusts

The concept of a trust is often heard when discussing estate planning or wills, but what is a trust? How may a trust assist in your estate planning? Is a trust right for you?

What is a trust? 

Put simply, a trust involves the transfer of assets to individuals or a trust company to hold on behalf of others. They consist of: 

• a ‘settlor’ who creates the trust and transfers assets to it
• ‘beneficiaries’ who are the individuals who may benefit from the trust assets
• ‘trustees’ who manage the trust assets. They are initially chosen by the settlor and can be the settlor, family members, friends or professionals
• the ‘trust fund’ which is the assets within the trust. 

A trust can be created in your lifetime by deed or set up in your will to take effect on your death. There are various forms of trust, with the most common types being:

A bare trust

This trust is often used to hold assets on behalf of a minor child. Once the child turns 18 the trust fund becomes theirs outright and the trust ends.

A life interest trust

This type of trust enables you to preserve the capital of your estate for future generations whilst at the same also time providing an income stream for a beneficiary (known in this case as the ‘life tenant’). The life tenant is entitled to the income from the trust during his or her lifetime or until the trust comes to an end.

After the death of the life tenant or after the trust has been brought to an end, the trust fund is passed onto other individuals or a separate trust, as specified in the trust itself. 

A discretionary trust

This type of trust is a flexible way of providing for a group of beneficiaries. No beneficiary is entitled to the trust fund and it is up to the trustees to choose which of the beneficiaries are to benefit, when and by how much. The trustees will consider the needs, personal and financial circumstances of each beneficiary and will take account any guidance you may have provided to them, although they are not legally obliged to follow it. 

This flexibility helps protect the trust fund, as the trustees can consider the position of each beneficiary as at the date they are considering passing assets from the trust to a beneficiary and may choose to delay a distribution, if appropriate. Additionally, the trustees can also consider how best to make a distribution, given the tax regime at that time. 

How is a trust of assistance? 

Trusts can offer assistance in a number of ways, for instance:

• if a person is too young or incapable of handling their own assets, a trust can assist that individual as the trustees will take responsibility for managing the trust fund
• a trust can protect family assets for future generations, as the trustees can determine at what stage to pass assets to the family, taking into account all of the circumstances at that time
• a trust can assist with inheritance tax planning.

Is a trust right for me?

This question can only be answered when considering your estate planning in the round, as it will depend on your objectives, the assets in question and your estate planning generally. Our team of advisers are best placed to advice you on whether trusts could help in terms of protection for your family or from an Inheritance Tax perspective. 

The content of this article is for general information purposes only. For further assistance or advice regarding trusts, please contact Susan Young on 01245 211260 or at [email protected]. Law covered as at April 2018.

This article is from the spring 2018 issue of Private Lives, our newsletter covering the key legal and tax issues that individuals face. To download the latest issue, please visit the newsletter section of our website.

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