In times gone by, trust funds were often used for the management of money that had been left in a will and to organise family settlements. These days, “trusts” have evolved into a genre of financial frameworks that allow individuals to protect their assets, distribute assets (however large or small) and manage wealth for today’s benefit and that of their future generations.
There are many reasons to set up a trust. These include avoiding the probate process, providing for your family after your death, and making a record of exactly how, and when, your descendants receive their inheritance. A full list of reasons has been made below.
Another thing to consider is although do-it-yourself kits are available on the market, the laws surrounding trusts are complicated and anyone considering opening one should consult a solicitor.
What Types Of Trusts Are There?
You might be opening a trust for one or many reasons since trusts are multipurpose legal products, they take many forms. The United Kingdom acknowledges numerous trust arrangements that should usually fall into one of the following categories. Each have their own rules and regulations:
Sometimes called a “Simple Trust,” a “bare trust” is a trust in which property or assets are held in the name of a trustee who has no power over what income is paid to the beneficiary and no active duties to perform. The beneficiary has sole right to the capital and income in its entirety at any time providing they are 18 or over (in England and Wales), or 16 and above (in Scotland). Bare trusts are often set up when assets are to be passed on to young people. Trustees are employed to ‘manage’ the assets until the beneficiary is of age to handle that responsibility themselves, which means any assets held in trust will always go directly to the intended beneficiary.
Interest in Possession Trusts:
These trusts enable an individual with a ”present right to the present enjoyment” of whatever is being held in it, meaning that any profit or income that arises from whatever is being held (such as rent/income) will be passed on as soon as it arises (less expenses and tax). This type of trust can maintain ”interest in possession” status for a fixed period, an indefinite period, or, most frequently, for the rest of the beneficiary’s life. In the case of the latter (a “life interest” trust), the ‘interest in possession’ terminates when the beneficiary (or “life tenant”) dies.
Unsurprisingly, this trust provides the trustee with discretion over how the trust is distributed. Discretion is to be exercised in accordance with the terms stated within the trust deed though it is entirely left to the trustees discretion as to when, how much and from what the beneficiaries inherit. Sometimes they must decide which of the potential beneficiaries is to benefit at a given time. These assets are said to be “held in trust” for the beneficiaries until they are able to decide what to do with them. A Discretionary Trust is a flexible investment often kept to maintain wealth within a family but allowing them a degree of flexibility to make decisions as to where the assets go.
Accumulation and Maintenance Trusts:
This kind of trust enables the trustees to increase the value of the assets held within it. Trustees are able to invest the capital or keep in savings in order to “accumulate”. This is done for a certain amount of time after which the beneficiary takes ownership of the property or benefits from some of the income arising from it. When the beneficiary reaches the age of 18 (but no older than 25), they can enjoy the full income generated by the trust.
This trust keeps multiple kinds of trust under one title. Some assets can be kept in an Interest in a Bare Trust, whilst others may be kept in a Discretionary Trust. These kind of Trusts are often created to benefit family members who are all beneficiaries but reach the age of inheritance at different times.
Reasons To Set Up A Trust
This is a fairly common reason for creating a trust. By avoiding probate, you and your family can save a considerable amount of money in legal fees and paperwork. A trust allows your beneficiaries to bypass the probate process, making access to your estate a smoother, quicker process. Also, your beneficiaries will avoid probate fees, often costing as much as 5 percent of the value your estate. Probate can become a drawn out process in some cases and inheritance cannot be accessed during this time.
If your beneficiaries are very young or don’t have the capability (or inclination) to manage the assets for themselves, you can appoint trustees to do so on their behalf. A trust can provide proper management of the distribution and management of assets should you wish.
Protection from Creditors
Property transferred into a trust is no longer owned by the settlor (you) or the beneficiaries. This is why it should not be subject to claims from creditors. Certain conditions must be met at the time of settlement however.
Protecting Against Relationship Property Claims
If you gift assets to your children during your lifetime, there is a chance that their partners could claim against these assets should their relationship end. By placing these assets in a trust instead, rather than naming your children in your will, they can continue to receive the benefit of the assets without them becoming their personal property, protecting them from claims made by partners.
Furthermore, if you are married or in a civil partnership, it is possible that some of your assets are jointly owned with your spouse. Should you separate, these assets must be divided between the two of you. By transferring assets to a family trust, they become assets of the trust rather than your personal property. This means they are protected from claims made by ex-spouses, subject to property laws.
Tax Related Issues
If you put assets into trust for your chosen beneficiaries, these assets are no longer part of your estate (for tax reasons), provided that you live for at least seven more years. Even if you do die within seven years, only the value of the gift is included within your estate. This means that from the day the trust is made, any growth on what has been invested is separate from, and will not be included in, an Inheritance Tax calculation.
Trusts, unlike ‘wills’, can not usually be contested. This means that you can be more confident that the beneficiaries of the trust (yourself included) will benefit from the trust in the ways intended.
This also benefits you if you intend to change your will in favour of other beneficiaries, but fear that this may be contested after you die. In other circumstances you might have an estate in excess of the nil rate band and want some Inheritance Tax planning. See above.
Some trusts offer you the flexibility to make a gift into trust for chosen beneficiaries but still continue to receive a benefit – discounted gift trusts and flexible reversion trusts allow clients this flexibility. If you are worried about a beneficiary not being having the maturity to manage the sum of your assets, some trusts allow trustees to keep control after the beneficiary reaches 18 without it having to become a discretionary trust.