Trusts

What is a trust?

A Trust is a legal term that describes ownership of property, investments or other assets by one or more people (“trustees”) or a trust corporation for the benefit of other people (“beneficiaries”).  

  • Sometimes Trusts come into existence because of circumstances and without a formal legal document
  • Generally though they are created by a legal document, often called a Settlement

Trusts can also be set up by a Will (a Will Trust).

Different trusts for different situations

  1. A Discretionary Trust is a trust where no individual person has any right to receive income or capital. Instead the trustees have the power to decide:
    • Who to benefit (out of a given list of beneficiaries named in the trust document)
    • When to benefit them; and
    • To what extent 

  2. A Life Interest Trust (or an Interest in Possession Trust) is used where one or more people are entitled to receive the income, but the capital is held for someone else or until some future event occurs 

  3. Accumulation and Maintenance Trusts were used very frequently in the past to benefit a particular child or children under a specified age.   Once the children reach that age, they are entitled to the income as a matter of right. Often they also become entitled to the capital.   Special tax rules now apply to this form of trust, and their use has been severely curtailed following the Finance Act 2006

  4. A Bare Trust is where trust property is held by a trustee or nominee, but it is really the absolute property of the beneficiary, who can require the trustee to transfer the trust property to him or her at any time.   Parents for instance, often hold savings accounts as nominees for their children

  5. Charitable Trusts, Investment Trusts and Pension Trusts are different categories and are not dealt with in this section although general trust principles apply to all types of trust

Why would I want to set up a Trust?

  1. To control assets

  2. To ensure secure arrangements for the future.  Trusts can ensure that property is kept within the family, and can prevent capital passing to non-family members.  Trusts also help to retain control of assets even if ownership has to be passed on for instance a family company or home

  3. To protect capital.  A trust can prevent assets being lost if:
    • A beneficiary has matrimonial or financial problems
    • Is unable to look after the property because of disability
    • Is just not careful with money  

  4. To reduce tax liabilities in the present or in the future.  Trusts can be a useful tool in the managements of tax mitigation schemes; particularly to reduce capital gains tax liabilities and future liabilities to inheritance tax.  Each type of trust can have different tax consequences at different steps throughout the trust period

Should I consider making a trust?

You should consider making a Trust if:

  • You can afford to pass over some of your capital without adversely affecting your future income or capital requirements; and
  • Any of the above situations apply to you

You may:

  • Create a Lifetime Settlement; or
  • Include a trust in your Will

In addition you may:

  • Be a beneficiary of the Settlement yourself
  • Exclude yourself or your spouse from any benefit (making yourself not subject to adverse tax consequences)

You can be a trustee yourself or appoint others.   

What duties do trustees have?

A trustee has an obligation to protect the trust property for the benefit of the beneficiaries.  His obligations or trusts will usually be set out in the Trust document.  Trustees also have certain statutory powers irrespective of whether those powers are set out in the Trust document.  These powers will usually include:

  • Power to accumulate income
  • Power to advance or pay over capital to beneficiaries

What will it cost to set up a trust?

  • There are legal costs associated with initial advice and the drafting of trust documents 
  • There may be valuation fees when the property enters the trust
  • There may be transfer costs associated with transferring shares or freehold/ leasehold property into the trust
  • There are likely to be accountancy costs and tax to pay.  Most trusts with assets exceeding the inheritance tax threshold will suffer some inheritance tax every ten years

What are the future running costs likely to be?

  • If the trust produces income there are likely to be costs in preparing trust accounts and annual tax returns
  • There may be brokers’ management fees and commissions
  • Tax will be levied on the income and capital within the trust, and the rate of tax applicable to trusts may be higher than for private individuals

How can a trust be brought to an end? 

  • By appointment of capital out of the trust to a beneficiary or beneficiaries
  • By the passage of time - some trusts are set up for a limited period or a particular purpose
  • By agreement of all the beneficiaries
  • By Court Order

Getting in touch

To learn more about how we can help you with Trusts, please contact David Endicott on 01295 204005 or email dendicott@se-law.co.uk