A trust can be thought of as a gift with conditions attached. A settlor (person making the trust) transfers assets to trustees, sets the conditions and names the beneficiaries. Trusts are managed by trustees for the benefit of the beneficiaries. They can be set up in lifetime or by Will.
What is a Trust?
A Trust is the formal transfer of assets (such as property, shares or money) to a group of people to hold for the benefit of other people. A trust can be set up during lifetime or after death via a Will.
The person creating the trust will set the conditions with which the trustees must comply. They will also name the beneficiaries either by name or by group (e.g. ‘my children’). The trustees must then manage the trust fund for the benefit of the beneficiaries.
How will it help?
Trusts are often used to protect the interest of the beneficiaries. A common use is in the case of second marriages to provide for a surviving spouse or civil partner but to also look after the deceased’s children. It can be used to protect against care home fees, divorces and bankruptcy.
It is often used as part of estate planning to preserve wealth long term by passing wealth onto future generations without granting them full access at a young age.
What happens if I make a gift without placing it into trust?
If you make a gift to somebody and it is not in trust, the gift belongs to them immediately (if gifted during your lifetime) or as soon as you die (if gifted via your will). In many circumstances, this will not cause a problem. However, if the beneficiary is in financial difficulties, is in the process of a marriage breakdown or is in care, then the inheritance may be lost.
What should I consider:
Value of your estate
Can you afford to make a gift? Once you have put assets into trust, you can not access them again.
The value placed into trust
If you place assets into trust and the value is above the Inheritance Tax threshold, you may be required to pay Inheritance Tax now.
Aim of the trust
What do you want to achieve by placing assets into trust. It may be possible to achieve your aims in a different way.
Type of trust
There are different types of trust available and the suitability of each trust will depend on your aims.
Common types of trust are listed below:
- Age contingent trust – a person is given an asset when they reach a certain age e.g. 25.
- Life interest trust – a person is given the right to receive the income or use of an asset (e.g. a property) for their lifetime and after that person dies, the asset is given to someone else.
- Discretionary Trust – rather than someone receiving a right to receive a share of the assets in trust, they are given a ‘potential right’ to receive an asset. It is up to the trustees to decide who to pay, how much to pay and when to make payment.
- Flexible Life Interest Trust – a combination of a life interest trust and discretionary trust. The income or right to use an asset (for example interest on money in a bank account) is given to a person for their lifetime (usually a surviving spouse) and the capital (for example money in a bank account) is paid at the trustees discretion.
Who should be trustee
Anyone over the age of 18 can be a trustee and professional trustees such as solicitors can also be appointed. It is also possible to appoint beneficiaries. It is a very onerous task and careful consideration should be given to the choice of trustee, especially in the case of a discretionary trust.