A Trust is a way of managing assets, such as property, investments or money. It is an oft-quoted misnomer that they are the exclusive preserve of the wealthy. However, our experience is that this simply isn’t the case and there are a wide variety of reasons for which individuals and families choose Trusts as a vehicle to hold assets. Some examples are:
- With the aim of preserving the value of assets (e.g. the family home) from possible depletion in the future (e.g. as a result of the burden of care home costs).
- To manage and protect the assets of someone who is currently too young to look after their own affairs.
- To hold assets on behalf of someone who is vulnerable and/or may be unable to manage them personally.
Broadly, Trusts involve the following three classes of individual or entity:
- The ‘Settlor’ – this is the person(s) or entity who puts assets into a Trust. They decide how the assets in a Trust should be used, usually setting this out in a legal document called a ‘Trust Deed’.
- The ‘Trustee’ – the person(s) or entity responsible for the ongoing management of the Trust. Trustees deal with the assets held in Trust according to the Trust Deed and Settlor’s wishes, manage the Trust on a day-to-day basis (including paying any tax which may become due) and decide how and when to invest or distribute the Trust’s assets in accordance with the Trust Deed and Settlor’s wishes.
- The ‘Beneficiary’ – the person(s) who benefit from the Trust, either by way of income generated (e.g. by receiving rent generated by property held in Trust) or capital (e.g. by receiving money held in Trust when he or she reaches a certain age), or both.
Trusts can either be set up during a Settlor’s lifetime (commonly referred to as a ‘Lifetime Trust’) or by their Will (known as a ‘Will Trust’).
Trusts can take a variety of different forms but the main types of Trusts are:
- Discretionary Trusts – a popular type of Trust due to their flexible nature; they allow trustees to determine when and how assets are distributed. Because beneficiaries do not have an absolute right to the assets of the Trust (distribution being at the discretion of the trustees), the Trust assets are not included in the estate of a beneficiary when they die, which may offer tax advantages. However, the disadvantage to beneficiaries is that they have no automatic right to benefit from the assets held in Trust, hence perhaps not leaving the beneficiaries in as secure a position as they may enjoy with other types of Trust. Quite often when settling up a Discretionary Trust the Settlor will have separately provided the Trustees with what is known as a ‘Letter of Wishes’ which, whilst not binding on the Trustees, is the Settlors chance to make any particular wishes known e.g. that a spouse be provided for or that the Trustees consider the personal circumstances of a particular beneficiary before passing monies to them in case this will cause difficulties such as impact on their health and any benefits they may be in receipt of.
- Bare Trusts – often the least expensive Trust to set up, these can be used to hold assets (including any income which they generate) on behalf of a beneficiary, the proceeds of which can be withdrawn by the beneficiary at any time.
- Liferent Trusts – the general arrangement with a Liferent Trust is that ownership of assets, usually a house, is transferred into a Trust. Liferent Trusts can be set up during a Settlor’s lifetime or included in a Will. When setting up a lifetime Liferent Trust the Settlor usually reserves the right to continue to occupy the house, continuing to pay all bills, repairs and insurance as they would normally. The ultimate beneficiaries of the Trust children or remoter descendants. Often the Settlor’s aim in setting up a Liferent Trust of this nature is that as ownership of the house has passed to a third party, the house will no longer form part of the Settlors estate for the purposes of any financial assessments e.g. for care home costs. However, such an arrangement carries no guarantees and from an inheritance tax perspective the value of the house is still included in the Settlor’s estate when they die, where they have continued to benefit from occupancy of it. Executors can be instructed via a Will that an individual be given a ‘liferent’ of a property with a direction as to who is ultimately to benefit (i.e. inherit) when the liferent comes to an end. Liferent Wills are often used by couples, either in a second marriage where there are children from a first marriage, or where the couple are seeking to shelter some of their assets from care home costs in the event the survivor of them goes into care.
Each type of Trust is treated differently by HMRC in respect of tax and before committing to setting up a Trust (either during their lifetime or by means of their Will) a Settlor should be absolutely clear on the implications for them and those whom they wish to ultimately benefit.
The climate of political opinion, nationally and internationally, has become more hostile towards Trusts (as illustrated by a recent Government-launched consultation on the taxation of Trusts) and it is likely that in the future there will be even more reporting obligations than there are at the moment in relation to Trusts. It may also be the case that in the future local authorities may be more aggressive towards Trust arrangements. However, despite popular belief, many Trusts are in fact set up for the purpose of protecting individuals and not just to minimise tax or care home costs.
To ensure a Trust achieves its intended aims, the importance of obtaining clear legal advice cannot be understated. Our advice to those wishing to set up a Trust is to consult a solicitor who specialises in Trusts. If you are minded to set up a Trust then it is better to do so as soon as possible as there is generally little advantage in delaying. Many of the solicitors within our Private Client team are members of The Society of Trust and Estate Practitioners (STEP) so when you contact us, you can be sure that you will receive the very best advice.
To speak to a member of our team about Trusts and how they may benefit you please call us on 03330 430150.