Setting up a Trust

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”).  

  • Trusts can sometimes come into existence because a circumstance has occurred and there isn’t a formal legal document present.
  • Generally, however, they are created by a legal document that is often known as a settlement.
  • Alternatively, trusts can be set up by a will (known as a will trust).

Many people look into setting up a trust fund in order to secure their assets but most wonder how to set up a trust in the first place. Below explains a little more about how to do just that.

There are different trusts for different situations

There are five main types of trust that you will need to know about when setting up a trust, whether you plan to leave assets to people close to you or whether you’re setting up a trust fund for a child. They are as follows:

A Discretionary Trust

Setting up a discretionary trust will mean that no individual person is entitled to receive anything and instead, the power is handed over to the trustees to decide. The trustees will then determine:

  • Who will benefit (when setting up the discretionary trust, you will name beneficiaries in the document).
  • When to benefit them
  • And to what extent they will be benefitted

A Life Interest Trust

Setting up a trust in the form of a life interest trust in the UK is when one or more people are entitled to receive the income, but the capital itself is held either for someone else or for when a future event occurs.

Accumulation and Maintenance Trusts

If you are setting up a trust for a child, then you will probably look into setting up an accumulation and maintenance trust. It’s worth knowing that, in the past setting up a trust in this way was a common occurrence because it benefitted a child or children under a specific age. Once the children reach the age specified, they then not only have rights to that income, but they were also usually entitled to the capital. However, special tax rules are now in place and apply to setting up this trust, which in turn has seen severe restriction on this as per the finance act 2006.

A Bare Trust

If you’re wondering how to set up a trust fund, a Bare trust is just another way of choosing who receives your estate. Setting up a trust in Bare Trust fund means that you can choose a nominee or trustee to hold the trust property, but really the beneficiary has complete rights to it and can ask the trustee to hand over the trust property at any time. A good example of this would be parents holding savings accounts as nominees for their children.

Charity, investments and pensions

Setting up a trust and learning how to set up a trust can also come in the form of charitable trusts, investment trusts and pension trusts but these particular trust set ups are not dealt with here.

Why should I consider setting up a Trust?

  • If you’re looking to control assets
  • To ensure secure arrangements for a time in the future, for example, if you’re setting up a trust to keep property in the family. Setting up a trust ensures that there is a chance to retain any assets or property even if ownership has to be passed onto a family company, for example.
  • Setting up a trust will protect capital. Having a trust in place can prevent assets being lost in circumstances such as:
  • A beneficiary has marriage problems and/or finance problems.
  • Is physically or mentally unable to look after the property due to a disability.
  • When a beneficiary is a little reckless with money.
  • Setting up a trust can also be useful tools when it comes to managing tax mitigation schemes. Setting up a trust will reduce tax liabilities in the present or in the future. Setting up a trust always comes with tax consequences.

When should I consider Setting up a Trust

You might be looking into setting up a trust but are not sure how to set up a trust or when the right time to set up a trust is. You should consider setting up a trust when:

  • 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 have a choice between:

  • Creating a lifetime settlement or
  • Including a trust within your will

In addition, you may:

  • Become a beneficiary of your own settlement yourself
  • Or even exclude yourself and your husband/wife from any benefit at all which will then avoid you being subject to any unwanted tax consequences.

When setting up a trust, you can be a trustee yourself, or appoint others.

The trustee Duty

A trustee in a trust set up has the responsibility of protecting the trust property for the beneficiary. When setting up a trust, you will make a trust document, where the trustee’s obligations will be laid out. However, regardless of whether these powers are set out in the trust document, a trustee has the right to:

  • Accumulate income
  • Pay capital to beneficiaries

The Cost of Setting up a Trust

If you’ve learnt how to set up a trust and are now wondering what the legal costs are associated with setting up a trust, please read below.

  • It’s important to remember that there are costs associated with the advice you receive about setting up a trust, as well as the original drafting process.
  • When the property enters the trust, there may be valuation fees.
  • 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 about future running costs?

  • If you have set up a trust that produces income, there will be costs in preparing the trust’s own accounts as well as annual tax returns.
  • Fees towards brokers’ management and commissions
  • Tax levies on the income and capital within the trust. When setting up a trust it is also important to remember that 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 ​Lucy Gordon on 01295 20​4045 or email ​lgordon@se-law.co.uk.